Cash flow is the primary fuel of any business, but when it is small and chasing growth, keeping track of the cash is essential. Knowing what is coming into your business is the driver but understanding what is also going out is the key.
From the outset, you should have robust processes in place for managing the money in your business. An up-to-date overview of your cash flow position at any one time will allow you to budget your spend according to what the business can afford at any one time.
Overspending or spending unnecessarily is a slippery slope, and one that could quickly spiral out of control. Cash flow is not able to manage itself and once it runs out, your business will grind to a halt.
So, a positive cash flow is always the goal. Without this you will be unable to meet salary runs, pay suppliers, invest in equipment or even respond to an unexpected cash emergency. Money needs to move smoothly through your business to keep the day-to-day operations functioning, and you need processes in place to make this happen.
We’ve collated some quick cash flow lessons to give you a few hints and tips on achieving cashflow control.
- Have robust credit management processes
Many growing businesses are, understandably, focussed primarily on the volume of sales. But without the cash to prove the sales, it can be a short-lived strategy. Invoicing for payment is essential, but actually collecting the money – on time – is the main challenge (and downfall) for many growing businesses.
Turning your sales into cold hard cash is the primary objective. And that requires more than simply invoicing your customers. Implementing effective credit management looks beyond this to prevent late payment or even non-payment by having processes in place to operate realistic credit limits, apply payment terms, set late payment reminders and send invoice reminders.
Read our blog ‘Your cash flow is only as good as your credit managament’
- Invest in a simple accounting system
Small businesses can benefit from automating their accounting to free up time for growing the business. An accounting system stores all of your data and information in one place, keeping your accounts organised and accurate. It will do all of your regular calculations for you, including your tax liabilities, as well as sending out invoices, invoice reminders and statements.
And as time and money are so crucial to achieving growth, an accounting system can bring both into your business. Not only will automation deliver speed and efficiency, but cost savings will be visible too; manual inputting and the involvement of an accountant on a day-to-day basis are no longer required.
- Apply invoicing techniques
As well as always being explicitly clear about the payment deadline, you also need to communicate the consequences of late payment. This could include, for example, a late payment penalty fee of 2% if the deadline is missed. The key is in ensuring that this is applied should the situation arise.
A more encouraging (and positive) technique, however, is to offer a small reward for early payment. This could be as simple as a discount of 2% for settling the invoice within 14 days rather than the standard 30 days.
Either way, adhering to strict payment terms are a must for businesses managing a delicate cashflow and a combination of robust credit management and automated accounting will support this.
- Operate deposits and instalments
If your business is service based, or accepts large volume product orders, then asking for a deposit upfront is common practice, especially if you are going to be out of pocket in any way. Not only does it act as a small guarantee of the complete order, it also helps to manage the flow of cash through your business.
And if your service is provided on a retainer basis over a given period, monthly payment plans are a great way to guarantee a regular income into your business, providing a consistent source of cash flow.
- Avoid late customer payments
Mitigating the opportunities for customers to pay late as much as possible is of great benefit to your business. The chances are that cash flow is tight and whilst it should be closely managed, it can be fluctuate greatly by the day. You can’t afford serial late payers on your books.
Planned investment in systems and processes as well as invoice incentives and payment plans are all great techniques within a cash flow strategy and should help to avoid regular late payment of invoices.
- Make your payments on time, but not late
In a complete contradiction of the above, a smart strategy for any small business owner is to hang onto your cash for as long as possible; set payments for your own outstanding invoices to be made on the date they are due.
But don’t get into the habit of making late payments.
This is only a short-term fix to a spiralling cash flow problem. Late payments come with interest rates and penalties making them harder to meet the longer they go on. And once the problem covers more than one invoice, the associated costs will quickly escalate.
- Don’t overspend
Every business wants to invest in absolutely everything it needs to grow but you need to do this strategically, and possibly in stages. Start by making sure that there is a validated business reason for your proposed spend whether this be new equipment, additional employees or bigger premises.
And take a look at your current and projected cashflow before you commit to the investment because you need to confident that you can afford to pay for it now, or in instalments over a given period. There is also the decision as to whether you spend from any capital reserves you may have, or whether you’re going to seek external finance to fund the purchase.
- Only commit to necessary external investment
There is an abundance of external finance solutions for small businesses, whether this is to plug a short-term cashflow gap or fund a long-term strategic plan.
Check out our blog ‘Alternative finance – ten accessible solutions for managing cash flow’
But there is a cost.
Depending on the finance you choose, and the purpose you require it for, there are considerations around the level of interest you will be paying and the timeframe you are committed to the cost for. External finance is great for funding a growing business, but it is a big financial commitment and each funding round should be independently assessed.
Cash flow is at the core of any growing business and quite possibly the single most challenging aspect of keeping that business afloat. But it can be managed, and kept under control, with the right lessons learnt and robust cashflow management strategies in place.
If you’re looking to grow your business but have cash flow issues to get under control first, speak to one of our advisers for some expert guidance on how we could help you and the types of finance that are available to meet your needs.