Cash flow is the life support system of your small business because every purchase your business has to make depends on it. How effective is your small business cash flow management?
Here are 8 keys for managing your cash flow.
Have Good Financial Systems
You need to know how much cash you have, where it has come from and where it has been going.
- Reconcile your bank accounts regularly.
- Have a disciplined approach to recording all expenditure.
- Find out how to get useful reports out of your accounting software.
Have a Realistic Cash Flow Forecast
Develop a cash flow forecast based on historic payments and receipts that have been adjusted for what you can reasonably expect is going to happen in the future.
- Forecast by month into the future as far as you can with any certainty.
- Accept that the further into the future the forecast is the less accurate it will be.
- Expect to become more skilful at forecasting as you recognise patterns and trends.
- Be realistic – avoid both optimism and pessimism
- Try to identify any assumptions.
- Identify months where your forecast cash levels will be insufficient and plan accordingly.
Sell, Sell, Sell!
Sales are where your future cash is hiding.
- Have clear sales targets and monitor them.
- Be aware of sudden changes in demand that could stretch your cash flow.
- Make sure your prices are up to date.
- If necessary use incentives and discounts to sell.
- To improve cash flow ask for;
- Deposits up front.
- Payment on delivery.
- Retainer fees.
- Staged payments, etc.
Watch Your Costs
While you have to work hard to produce sales, costs seem to come with no effort at all!
- Have an accurate budget that you can track costs against.
- Don’t let your cost base get beyond where your business is presently.
- Any stepped increase in your costs should justify themselves by allowing you to charge more or sell more.
- Don’t leave money on the table when negotiating.
- Be prepared to switch suppliers regularly.
Bring the Cash In
Making sales doesn’t help cash flow until the cash is in your bank account.
- Make paying you really easy!
- Remove anything that delays payment.
- Only give away credit terms that are necessary to secure a sale.
- If customers will buy on 7 day terms do not give them 30 days.
- If the customer wants credit terms you can’t afford consider accepting credit card payments.
- Invoice as soon as possible.
- Chase late payments the day they become due – especially for new customers.
- Don’t send statements instead of calling to chase late payments.
- If you are calling about a late payment make sure you get a date for payment before ending the call.
- You can also consider;
- Early payment discounts.
- Late payment penalties.
- Legal action.
Be Nice to Suppliers
Be nice to your suppliers you might need them.
- Don’t be afraid to ask for the credit terms that you need.
- Create goodwill with your suppliers while things are good.
- Pay within the credit terms.
- Raise any queries over invoices as soon as they are received.
Get the Inventory Balance Right
Inventory is money that you could be using for other things.
- Monitor what inventory is selling and how quickly.
- Sell any slow moving inventory before it becomes obsolete.
- Use promotions to sell slow moving inventory.
- Aim to hold the minimum inventory level at which you can still fulfil all sales for customers.
Get on Well With Your Bank
Maintain a good and open relationship with your bank.
- While cash flow is good discuss your options for further lending.
- Don’t surprise your bank with bad news!
- Anything unexpected increases uncertainty and the perceived risk of your business.
- That perception of risk will cost you if you do end up needing to borrow money.
- If you do need help, financing can come in a number of forms;
- Business loan.
- Asset Financing.
- Invoice discounts.
- Hire purchase leases.
Learning to manage your cash flow while things are going well will put you in a much stronger position when money is tight. However, cash management is not just a defence against bad times but it also enables you to efficiently invest profits back into the business during good times. So learn to manage your cash flow and set your business free.
© Business Set Free Ltd 2013