Managing cash flow is the primary concern for most small business owners. In the early stages of owning a business, money is usually tight and maintaining proper control of finances is essential to survival.
Theoretically, cash-flow management seems simple. Reduce costs, increase profits, improve payment terms with your creditors and keep on top of what’s owed to you. Reality is very different. If you don’t know what your income and expenditure are and haven’t got a buffer to cover unexpected expenses, then you are likely to fail.
In this article, we’ll look at how you can manage cash flow effectively and ensure your business is successful.
Use a cash-flow forecast for planning
A cash-flow forecast shows your estimated business transactions (income and costs) across a defined period. It helps you see how much money you will need to pay your bills each month so you can plan ahead. For example, if you run a seasonal business, it will identify your slower months where your income may not cover your outgoings. You can then put money aside to cover those months.
It’s sensible to review your cash-flow forecast regularly so you can anticipate any potential issues and address them before they affect your business. Invest in some accounting software, and you’ll be able to access your cash-flow forecast in real time.
Minimise payment risk
Late payments hit small businesses hard and can cause serious cash-flow issues. There are several actions you can take to reduce the risk of late or non-payment, such as:
● Offering an early payment discount
● Credit checking customers
● Asking for payment up front or in advance
● Getting customers to sign a contract
● Introducing a set of terms and conditions which includes payment terms
● Building a relationship with customers (people find it harder not to pay someone they know)
● Make it easy for customers to pay you (easy checkout on your website or offer multiple payment options)
Agree payment terms with your customers upfront and address issues early. If you have payment issues, the Government-appointed Small Business Commissioner offers advice to small businesses on how to deal with payment problems.
Best practice for managing your outgoings
The last thing you want when you’re trying to establish your business is to get a reputation as a poor payer. Your cash-flow forecast should show all your outgoings, so you clearly understand your regular payment obligations. To manage your outgoings, you can:
● Carry out a monthly review
● Pay your bills by direct debit where possible
● Automate your payroll
● Stipulate payment terms for contractors or temporary staff in a contract
● Put money aside each month for your tax bill
● Save some money each month for unexpected expenses or lean periods
Manage your stock levels
Strike the right balance with your stock levels, so you’re not tying up precious cash by holding stock you don’t immediately need. Your accounting software may have an inventory management module that you can use to manage your stock in real time.
Price your products and services correctly
It may be tempting to price your products and services below what they are really worth when you’re establishing your business. Don’t undervalue your offering, though, especially if you’re struggling with cash flow. Look out for the warning signs that you’re not charging enough. If you’re:
- Selling a lot of products or people are queuing up for your services
- Being paid on time
- Having cash-flow problems
Then you probably need to review your pricing structure and increase your prices.
Be ruthless with outgoings
Sometimes you will have to make tough decisions to deal with cash-flow issues. The first step is to review your outgoings and identify where you can save money. Cut any non-essential costs and put on hold discretionary spending such as buying new equipment. Review your utility and insurance costs and see if you can get them cheaper elsewhere. Look at any loans or credit cards you have and see if you can get better interest rates from other providers.
If you employ staff, salaries are likely to be your biggest outgoing. You may want to consider reducing headcount to improve your cash flow. Another alternative is cutting your salary until your business becomes more stable.
If you haven’t got enough money set aside to cover lean periods or grow your business, there are credit options you could access such as:
- Taking out a loan
- Applying for a credit card
- Finding a business partner who has money to invest in the business
Make sure you can afford the repayments on any credit you secure. If you’re already struggling financially, taking out credit may make your financial position worse. Before signing up to credit, get advice from your accountant or financial advisor on the best option for your business.
Managing your cash flow effectively will help you lay solid foundations for your business. You’ll be able to make informed decisions about where to cut back your spending, when you can afford to invest more and growth opportunities. If you’d like some advice on managing your cash flow, speak to one of our accountancy specialists today.