How important is it that you properly manage your cash flow?
Well according to the experts on it, Dun & Bradstreet, 9 out of 10 small businesses that fail do so because of cash flow issues. That’s why cash flow is king, and clearly a high proportion of small businesses struggle with getting it right.
The starting point is to make sure your business has sufficient working capital to cover your day to day operations, and if you are growing enough to cover the additional costs. You can work out how much cash you need by preparing a cash flow forecast, and by keeping it updated you can spot a potential problem allowing you to deal with it in a proactive way. Many businesses forecast cash flow for up to 12 months ahead (and even for up to 5 years) broken down on a monthly basis. Businesses where cash flow is critical will probably need to forecast on a weekly basis.
Within a business we can have changes in stock levels, debtors, and creditors; and we may purchase equipment; therefore whilst you might be profitable it does not always equate to cash. Remember stock only turns into sales when you sell it (so don’t overstock) and sales only turn into cash once you actually receive the payment.
Cash Flow can be the biggest problem for a new start up business, particularly where credit is extended to customers. So, what are the things we can do in our businesses to ensure that money flows in as quickly as possible:
✔ Make sure that you have clear terms and conditions of sale, and where credit is being offered that payments terms are understood. The traditional “30 days” may be excessive and consider if you can have a shorter period. Always show payment terms and the due date for payment on invoices.
V Promptly invoice customers, if you delay by a week it’s another week’s credit!
✔ Make it easy for customers to pay by including bank details on invoices.
✔ Pro-actively manage your customers, this might well include a customer service call prior to the payment due date checking that all is in order; any issues raised can then be dealt with. If the credit period is exceeded promptly make contact confirming when you can expect payment.
✔ Consider credit checking new customers and existing customers where you have a large exposure. Your bank or on-line agencies can do this for you.
Don’t forget your suppliers, negotiate extended credit periods where possible, don’t pay before the due date, and keep them in the loop if payment has to be delayed.
And just in case you do have a short-term cash flow issues a small bank overdraft can help smooth things out.
You can find more help on cash flow on our website including a “how to guide”, cash flow templates, and business workshops.
To quote Richard Branson, “Never take your eyes off the cash flow because it's the life blood of business”.
Want to know more about cash flow? Sign up to one of our Managing Cash Flow workshops...