Managing cash flow and making sure a business has enough cash to meet its needs is absolutely critical.
Despite acknowledging that it is core to running a successful business, many small businesses fail not because their fundamental idea isn’t sound, or because they’re not making money, but because they fail to manage cash flow and run out of cash to pay the bills.
There is an old maxim that no business ever collapsed because of lack of profitability but many have gone under because they lacked cash. Managing your cash resources and making sure you have enough to meet your needs, such as paying wages, buying supplies and meeting your personal financial requirements, is absolutely critical.
The following tips should help small firms keep on top of their cash flow:
Make sure you have up-to-date information
The average small business relies on management accounts that are four months out of date, meaning it’s hard to really know the current situation. Ensuring small businesses have accurate financial information can make a real difference to stabilising cash flow. Software packages can provide business owners with an accurate impression of where they stand at any given time, helping them to identify when they could run short of cash (Ask us about our basic management reporting service).
Companies should also be taking measures such as depositing cash in interest- earning accounts to increase the amount of money they earn while it is with them. Even a low interest rate can generate a bit of extra money if the amount in the account is high enough, so it’s worth reviewing your bank to see if there is a better option available.
Stay on top of debtors
Make sure you agree payment terms with customers in advance of any deal, and be sure to vet who you are trading with, particularly for new customers. Take reasonable steps to credit-check customers and, if in doubt, trade on a cash-upfront basis. Be clear about your payment terms, set credit limits and stick to them.
My single most valuable piece of advice would be to issue sales invoices as soon as goods are shipped or services provided. Don’t save them up and send them out at the month-end. In my experience, the quicker you invoice customers, the more likely you are to be paid on time.
Have an escalation process
Ensure you also have a process to follow up on any late payment. This should include letters, email, and telephone, with the need to stay flexible if the amount outstanding is large, or if you have concerns over the customer’s financial viability. This may include withholding further deliveries if required.
Utilise credit and charge card facilities
Credit and charge cards include a range of payment terms and interest-free options that can help businesses manage expenses and ensure that they keep control of cash flow even where unexpected costs arise. Flexible spending limits, online account management and the opportunity to defer payment on purchases are just some of the benefits you can find on small business cards, which make them a great tool for managing everyday business spending. To make your money work harder it’s also worth researching what rewards are on offer for your spending that can be reinvested in your business or used to treat yourself for all your hard work.
Consider short-term funding options
Invoice financing allows business to sell their invoices in return for a fee or a percentage of the invoice value. It can serve as an effective stopgap for small businesses to maintain a healthy cash flow while waiting to be paid.
Forecast your future income
Working out what’s likely to be coming in, and when, can help you plan for any potential difficulties. Building a cashflow forecast model will generally give you a good idea of where your cash position will be. There are a number of software packages designed for small businesses that will help with this, while VIDEN can often provide access to this service for a small charge.
It’s also a good idea to track your outgoings during that month. This may include suppliers, utilities, wages and taxes, and then deducting them when payments are required.” As the saying goes, forewarned is forearmed.