Cash flow is the term for the money that flows in and out of your business. From petty cash to business capital, cash is what keeps small businesses alive. While it is usually measured monthly, quarterly or annually, your cash flow should always be at the forefront of your mind.
While most small businesses fail in their first six months, cash flow problems more commonly affect those who survive that first turbulent year. Many small businesses grow too fast in their early years and they do so without keeping an eye on the financial side of the business.
It’s easy to take on more work, but sometimes it can feel like the business is running at full capacity and on paper, it might be. If you spend all your time focusing on bringing in new work, it’s very easy to lose sight of essential backend processes. Those dull things like paying your suppliers and even your own employees, and chasing up cash due from customers.
Have a cash flow forecast
They say that being forewarned is forearmed and a cash flow forecast is how you arm yourself against a cash flow crisis. A cash flow forecast allows you to see which months you can expect to see a cash deficit, and which months you can expect a surplus. It’s a great resource to help you make important decisions, such as when to make a capital expenditure, or whether or not to cut an expense. It will give you a pretty good idea of how much cash your business is going to require over the next year or so to survive.
You can also gain insight into your business by comparing actual figures to what you forecasted. If you see discrepancies between the figures, you know to dig deeper to see what might be happening. For example, if you discover that you’re spending twice as much on electricity as you thought, you could look into energy efficiency and find ways to save energy. Or, it could be an indication that you need to switch providers for a more competitive rate.
Make payments easy
The sad truth is that there’s no way to guarantee that clients pay on time unless you charge them up front. But, you can reduce the likelihood of late payments by writing contracts with clear payment due dates. You can also incentivise clients to pay on time by offering a discount for early payments, or charges for late ones. Most importantly, make it as easy as possible for people to pay you. Make your payment terms easy to understand so there’s no confusion.
Don’t settle for payment terms
Like energy bills and car insurance, you should regularly review the terms you receive from suppliers. Are you a significant customer to them? Could you negotiate a better deal? If you have the cash in the bank, then negotiate with suppliers to pay more quickly in return for discounts. This will ultimately return more on your money than the bank will in interest. The savings you make will improve your company’s cash flow.
Organise your books
Many small business owners let their bookkeeping fall to the wayside because they’re so busy running their business. Ignoring the books leads to bills not being paid and invoices not chased. Other issues include inconsistent invoicing figures, inaccurate reports and forecasting and general loss of financial control. Disorganised books also make your tax responsibilities harder to meet. This could potentially lead to an unwelcome fine or larger tax bill than you anticipated.
Once your books are in good order, you’ll be able to generate useful reports so that you can understand your cash flow much more easily.
Anticipate problems before they happen
Identify potential cash flow problems in advance to avert a crisis before it lands. By regularly updating your cash flow forecasts and monitoring market conditions, you can stay ahead of the game. But, don’t just look internally; keeping an eye on customers and suppliers who may be in trouble can give you notice of how that could affect you in turn.
Don’t bury your head in the sand and hope an issue will go away. A cash flow crisis only gets worse if you ignore it. Keep on top of your cash flow and you’ll be able to deal with problems quickly and efficiently.