How to manage your cash flow
As a small business with tight margins, making sure you have a regular and healthy cash flow is hugely important. Here’s a few ways to keep things moving…
Keeping the cash flowing can be a major problem for some small businesses. One in five have experienced cash flow problems, according to the latest Business in Britain report from Lloyds Bank.
Here are a few ways you can avoid being one of the firms experiencing problems…
Managing cash flow is not about knowing how things went in the past, but predicting how your business will run in the future. And while no one can do this with 100% accuracy, setting yourself targets is a good way to keep things going at the pace you set.
Setting targets like break-even points are vital in managing cash flow. If you know when your business is profitable, then you will be better able to know when you might have some excess cash.
Know when to pay and when to collect
Cash flow is a balance between getting receivables in as fast as possible and holding out with payments for as long as you can within the boundaries of your contracts.
Late payment is a major issue for small firms with 59% citing it as a cause of cash flow problems. In fact, according to Business Minister Baroness Neville-Rolfe late payments by large firms to small and medium-sized enterprises stand at £27 billion.
Finding ways to get firms to pay up fast is important. This could be by making your payment terms as clear and as easy to complete as possible, following up on customers and even offering discounts for prompt payment. For new customers, get deposits and credit cheques.
For payments, pay only when you need to. If you have 30 days to pay, use all 30 days. Set up automated payments to go out on the last day possible – this keeps clients happy as they know when they’ll be paid and allows you to hold onto the money for longer.
The phrase ‘penny-wise, pound foolish’ is fitting when it comes to small business’s cash flow. By ignoring small payments or one of payments, you could put your future cash flow in jeopardy. You need to be on top of every penny that comes in and out of your business from petty cash to interest payments. This will give you the clearest picture of your current and future cash flow.
The same goes for general monitoring of your cash flow. The best way to keep an eye on things is to have a cash flow monitor who could use technology like cloud-based cash flow spreadsheets or apps to keep on top of things.
Back up plans
You also need to become familiar with any potential bumps in the road. These could include potential late payers and times of the year when things might slow down. In fact, 37% of businesses say their cash flow difficulties were caused by a fall in demand for products and services.
If you see potential shortfalls in the future, then get your plan in place early. A bank is more likely to lend to someone who needs money for down the line than for the next day.
Finally, you’ll need a back-up plan if all else fails. This could include having some cash reserves.