Effective cashflow management is crucial. Although it’s a challenge and you need to be making enough sales, there are many things you can do to ensure sufficient cash enters your business when you need it to.
The well-worn business cliché is true: turnover is vanity; profit is sanity; cash is reality. But what does it mean?
Well, it’s not simply a question of how much you sell or how much margin you add, it’s how much cash you have available to you. Many profitable and seemingly successful businesses have failed because they haven’t been able to pay their bills on demand.
To avoid nasty surprises, you must remain aware of your cash position at all times. Basically, this is how much you owe, how much you’re owed and how much you have in the bank.
Healthy cashflow isn’t achieved simply by making sure your outgoings don’t exceed income. If you’re to survive, sufficient cash must enter your business so you can pay your bills when your suppliers ask for their money.
Sales forecasting can be difficult for those who lack experience. Having a good knowledge of your market helps. Then you can estimate, with some level of reliability, what you will sell, when and how much revenue this will generate.
Then you can predict the future cash needs of your business, once your anticipated costs have been subtracted. If sales are likely to dip during a given period, you know with good notice that you need to arrange a loan or overdraft extension, for example, or cut your costs.
The lower your spending, the less likely it is you’ll face cashflow problems. You must keep a tight rein on your costs at all times and there should always be a genuine business reason for every purchase. Buy from suppliers who offer the best value for money – which doesn’t necessarily mean the cheapest.
Assess your spending every week. Try to identify areas where savings can be made. Weigh up all fixed costs (also called ‘overheads’) and variable costs, but be aware that cutting costs too drastically or in the wrong places can damage your business. Cost cutting often involves having to make difficult or unpleasant decisions, but you cannot show reluctance.
Effective credit control measures need to be in place right from the off. Before you grant credit, all new customers should be checked – and re-checked once a year. Circumstances can change. Don’t grant overly generous credit terms, either.
If you issue invoices, get them out promptly. Chase all payments as soon as they’re due and charge interest on late payments. If viable, provide incentives for early payment, perhaps a small discount. When things get tough, consider whether debt factoring (ie selling invoices to a third party) or invoice discounting (ie drawing against unpaid invoices for a percentage) would ease your cashflow. If the customer refuses to pay, you may have to take action to recover the debt.
The classic signs of cashflow problems are an ever-increasing overdraft and difficulty paying bills. Make sure your financial records are accurate and updated regularly, and carry out a financial health check of you business at least every quarter. You need to act quickly and decisively if you are to stop short-term cashflow problems spelling the beginning of the end for your business.
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