Cashflow is king for small and medium-sized businesses.
And managing cashflow effectively can mean the difference between a
business surviving or going under.
And, in today's cash-constrained economy, cashflow, like the
right business insurance, is more
important than ever.
It's worthwhile first of all defining what cashflow actually is.
It's essentially a business's ability to pay its regular bills. If
your cashflow is properly managed it means you have enough income
at the right time to pay those bills that need to be settled.
So, cashflow is money your business has access to at any one time -
what it isn't is money in the pipeline.
Most of a business's outgoings are generally foreseeable -
things like wages, loan repayments, rent, tax, phone bills and so
on. Being able to pay them is what makes for successful
cashflow management.
Ideally, any business should have a constant inflow of cash that
exceeds its outflow, but this is not always possible and most
businesses will have dips and troughs, which is where the cashflow
problems can begin.
So, how can a small business improve cashflow management?
Here are 12 suggestions, all of which can probably be adopted by
any type of business.
- Send out your bill promptly. Getting paid promptly is the
key to good cashflow management and that means keeping on top of
sending out invoices.
- Get your billing right. Make sure your business's
invoices are correct, properly sequentially numbered, have your
company number and address on and specify exactly what payment is
for, on what terms and have the right amount of VAT added. This is
all vital, because if they are wrong, they will often simply be
sent back and payment will be delayed.
- Emergency cash. Have an emergency fund besides a normal
cash float. Keep this money on deposit, but in an account that is
readily accessible. Once any part has been used, make sure the
business repays that money. This is rather like having
insurance for your business's cashflow. Treat this cash as an
emergency resource and use it after all other cash avenues have
been exhausted.
- Put cheques in the bank fast. Deposit cheques
immediately. Don't wait until a set day each month. If
customers still pay you by cheques - and some still do write them!
- then pay them into the bank right away.
- Get cash upfront. If you need to pay large outlays to
complete an order - for example, for parts or materials - asking
for a deposit against these materials is a good idea and will help
with cashflow, especially if the work will be spread over a lengthy
period. Again, staged payments may be an option in these
circumstances also
- Cut your prices. Offer discounts for early settlement of
invoices. This is a strong incentive for customers to settle
invoices more quickly.
- Use forecasts. This can be difficult if you are running a
new business, but not impossible if some realistic assumptions are
made. If you have an established business, look at the previous 12
months of trading and compare conditions. A 12-month forecast
can give you a clear pattern of peaks and troughs in terms off
cashflow, which can be a huge help when planning.
Of course, such a forecast must take into account money actually
collected rather than work done, or products sold and invoices sent
out.
- Review forecasts. Most important, a forecast is only as good as
the use you make of it. The exercise of drawing it up is not the
job done. Reviewing it regularly and seeing if matters are
proceeding as expected is the way it can be useful in alerting your
business to problems. The chances are it will need constant
tweaking because the reality doesn't quite match the
forecast. Even so, spotting a challenging cashflow period a
few months in advance could be a business lifesaver.
- Follow up on unpaid invoices. Don't let things slide, instead
promptly take action if money is slow to come in. Sometimes a
gentle reminder, perhaps a phone call, is all it takes.
- Spread costs. Think about paying for equipment by
installments, or hiring equipment, to spread the cost. Capital
outlay can be a huge drain on a small company's resources and have
a hugely negative effect on cashflow.
- Meet your own deadlines. Be sure to deliver the service or
product you are selling on time. If you don't, then you won't be
paid at the time you have forecast.
- Watch your overheads. Constantly look for ways to reduce
costs. Saving money your business needs to spend regularly is
probably one of the most obvious ways of improving cashflow, and
yet many businesses wait until times are challenging before
carrying out a review of costs. It's just as important to look at
ongoing costs when the business is doing well - that way you'll be
better placed to deal with any cashflow problems should they
arise.
