Effective cash flow management is crucial to running your business. Although it's a challenge and you need to be making enough sales, there are many ways to keep your cash flow positive and make sure sufficient cash enters your business when you need it.
Make cash flow your priority
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 cash flow has faltered. As a result, they haven't been able to pay bills on demand.
To avoid nasty surprises, you must remain aware of your cash flow at all times. Basically, you should be able to see how much you owe, how much you're owed and how much you have in the bank.
Healthy cash flow 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 suppliers ask for their money.
Making sales forecasts
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.
Boost cash flow via cost control
The lower your spending, the less likely it is you'll face cash flow 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 and cash flow every week. Accounting software often includes a cash flow report that makes it easy to understand where you stand.
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 - even if it does temporarily improve your cash flow.
Cost cutting often involves having to make difficult or unpleasant decisions.
Credit control and cash flow
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, because these can really hit your cash flow.
Calculate interest on an overdue invoice
Use this free, late payment interest calculator on the Small Business Commissioner's website to work out how much interest and compensation you can charge on an unpaid invoice.
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 cash flow. If the customer refuses to pay, you may have to take action to recover the debt.
The classic signs of cash flow 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 your business at least every quarter.
You need to act quickly and decisively if you are to stop short-term cash flow problems spelling the beginning of the end for your business.