It is hard to overstate how important cash flow is to your business. In fact, it may not be going too far to say that cash flow is your business. With a healthy flow of payments coming in and control of the amount of money going out you can plan for growth, keep on top of debt, apply for finance and keep things running smoothly.
The ingredients of healthy cash flow
Obviously, the best position your business can be in is when more money is coming in than going out. To make this happen it is essential to balance the amount of money you’re owed by customers (accounts receivable), the amount of money you owe to suppliers (accounts payable) and any shortfall (money you owe that exceeds your available funds).
It takes constant diligence to keep on top of these three factors. If the amount of money you owe begins to outstrip the amount of money coming in then you will enter negative cash flow, which can be a very hard position to get out of.
Cash flow versus profit
Profit and cash flow are both important for your business.
However, on a day-to-day basis cash flow is more important to keeping your business running.
Your business may be in profit overall, but if the movement of revenue in and out of the business is not steady and balanced you will risk having periods of negative cash flow. If your profits look good on paper but money feels tight it’s time to look at how you’re managing your finances.
Ten tips for managing cash flow
1.Know what you need to break even
To begin to control cash flow it is essential to know how much money you need for your business to break even in a specific period. The time frame will vary depending on how long or short term a view you’re taking. However, if you’re consistently making less money than you require to break even then you need to do something about it.
2.Have a cash buffer
Just as it’s important to have savings as an individual, your business should have a cash reserve to dip into when necessary. This will give you flexibility, security and confidence during periods when there is less money coming in.
3.Keep on top of your invoicing
There are many, many balls to juggle when you’re running a business, especially if you’re a sole trader or a small business with only a few members of staff. However, to maintain healthy cash flow it is essential to keep on top of your invoicing. Make sure you invoice early but accurately (having to recalculate invoices or deal with disputes takes a lot of time) and send timely reminders for late payments. It’s also important to have clear terms for payments and to outline these to customers when you begin working with them. For particularly long-term or resource intensive work you may also want to charge for part of the work in advance, or invoice regularly throughout the lifetime of the project.
4.Know who you’re working with
Over time you will be able to get to know regular customers and their payment patterns. This can help you predict cash flow more accurately. When you’re dealing with new customers it’s good to get an idea of how promptly they pay. This could come through a casual chat with another business that supplies them or a formal credit check.
5.Have people and systems in place to monitor cash flow
Monitoring cash flow is not something you can let slip. It’s really important to have an accurate picture of your position at all times so you can plan for the future and identify any issues early. If possible, you should consider employing someone who is focused purely on this aspect of the business. This could also be the same person who is dedicated to chasing invoices. If you’re a sole trader, try and put time aside regularly to look at cash flow and monitor your finances. You should also consider using accounting software such as Sage to predict and measure your cash flow.
6.Have plans in place for late payers
If you have customers who are really taking a long time to pay, then you are entitled to charge them an extra late payment fee and interest. Make it clear that late payers are liable to incur this penalty when you invoice and when you negotiate with the customer in the first instance. You can also consider engaging a debt recovery agency to recover the money.
7.Don’t forget about tax
When managing your finances make sure you are putting away enough money to cover regular tax bills, whether these are annual or more regular (such as VAT). Making sure you have enough money saved to pay tax promptly and easily will relieve a lot of stress and potential penalties.
8.Keep on planning
It is essential that any business keeps moving forward and trying to develop. This has many benefits, but will also be good for your cash flow. Ask yourself whether there are particular periods or circumstances where revenue dips. Can you come up with diversifications or innovations that will fill these gaps?
9.Trim the fat
Just as it’s important to keep a keen eye on the money coming into your business, you should always be looking to reduce outgoings as well. Are you getting the best terms from your suppliers? Could you negotiate with them to spread or reduce costs? Do you have opportunities to reduce other overheads or make the business run more efficiently?
10.Keep communicating with your bank
Banks don’t like surprises! Lots of businesses take out loans to cover short-term cash flow issues or other costs, but you should make your bank aware well in advance and have all the necessary projections available to identify borrowing requirements.
Our top tip: Get in touch with robinson+co for help
At robinson+co monitoring cash flow and answering questions about financial management and business planning is what we do every day. Get in touch to discuss how we can help you maintain a sustainable cash flow and keep your business in a good position now and into the future. Call us on 01900 603623 or email to [email protected] for more information.