By Mike Smith
One of the biggest headaches for almost every small business owner/director is maintaining sufficient levels of cash to pay their expenses when due. Even successful, profitable businesses can struggle to manage their cash flow, particularly in the first couple of years. With late payments from customers and clients a constant worry, and a seemingly never ending list of payments to make to landlords, suppliers, HMRC and utility providers to name but a few, taking your eye off your cash levels for any length of time can be critical.
Poor cash flow is one of the leading causes of business insolvency. Even viable businesses and those that are growing rapidly can find themselves without the money they need to operate effectively. With cash flow clearly such a big challenge for small companies, it’s essential business owners know how to steer their businesses towards cash flow success. Here are our tips…
Create a cash flow forecast
Before you do anything else, it is essential you maintain some sort of forecast of your cash flow. You do not need the assistance of a qualified accountant to do this. All you need is something as simple as an Excel spreadsheet which forecasts your income and expenditure over the next six to 12 months. Spending just a few minutes every week updating this document will help you avoid any nasty surprises.
Focus on cash flow, not profit
In the early days, having sufficient levels of cash to run your business effectively is actually much more important than profit. Many new businesses don’t make a profit until year two or year three, but run out of cash early on and your business will never get that chance.
Maintain some cash reserves
Every business faces unexpected expenses it cannot foresee and without cash in the bank this can be enough to drive the business to insolvency. Having cash reserves allows you to navigate potential cash flow shortfalls without it impacting on your ability to run the business effectively.
Encourage faster payments
Late customer payments are a scourge of the small business economy and are driving many SMEs into debt. Keeping credit terms to a minimum and having a periodic collections procedure in place plays an essential part in keeping payments prompt. Faster payments can also be encouraged by offering incentives such as early payment discounts.
Consider invoice finance
If lengthy credit terms are putting a strain on your cash flow, invoice finance is an innovative form of short-term finance you may wish to consider. Companies like Business Expert allow you to compare invoice finance providers so you can release the money tied up in customer invoices within 24 hours of their issue.
Set clear payment terms
30 or even 60-day payment terms might be the standard in your industry but that doesn’t mean it’s something you have to subscribe to. As long as you make your payment terms clear before a purchase is made then you are well within your rights to ask for payments within 14 days of the delivery of the product or service or even to demand 50 percent upfront.
Streamlining may not be possible in every small business, but simply moving to the best tariffs and negotiating better deals with suppliers can help to keep your costs down. Many suppliers will not want to lose your business and will be willing to agree better deals to keep your custom. If they don’t, perhaps you could find a better price elsewhere..?
Increase profit margins
Easier said than done you might think, but many small businesses could charge more for the products of services they offer without detrimentally impacting demand. Equally, negotiating better deals will help to increase those all-important profit margins.
Mike Smith, Director at Company Debt