Healthy cash flow is key to a strong business. Positive cash flow comes about through planning and being prepared.
A new business in particular is looking to grow but this can be a trap. Often businesses load themselves up with way too many overheads, then sales revenue lags and the business ends up struggling to pay bills.
Improving your cash flow means you have to attack this issue from both ends. This means shortening the time that you are paid for sales and delaying outgoings by as much as possible.
1. Work Out a Current, Accurate Cash Flow Position
Proper forecasting and planning is key to avoid nasty surprises with cash flow. At first you want to model your current cash flow position by plotting it out in the form of a business cash flow forecast.
This can be done via a very simple spreadsheet that records your opening bank balance and then a record of all the money coming in and going out over a certain time period. Consider your fixed costs like rent, but also your marginal costs like how you need to use a certain amount of product per job. Then you can look at customer data to see when sales are made and average payment times for each sale.
Such forecasts will also need to accurately capture the lag between incomings and outgoings. You can be put in a challenging financial position if you are getting squeezed from two ends with customers not paying and suppliers demanding payment.
2. What to Do if You’re Heading towards Negative Cash Flow
One strategy is to make it so there can be adjustments in your costs to combat late payments from sales. Accurate forecasting and solid planning will take into account unavoidable fixed costs and planning to ensure that these can be paid should be a focus of the business.
Ensuring that you do not use all your cash on hand can be the key to avoiding challenging situations. This means having emergency cash supplies for unexpected expenditures.
Although you will incur some extra costs, this can be achieved by using credit for certain purchases from suppliers. Industries that have large capital expenditure involved may have no choice but to go with finance and pay off when the revenue from the project comes through some months later. But the flexibility offered by such arrangements can be very beneficial to cash flow.
3. Making More Sales is Not Always the Best Play
It is important to realise that an extra sale does not immediately improve your cash flow. Profit is not cash flow. Depending on the business, sales may not be paid for 30 days or longer after the sale is made.
Counterintuitively, selling more can sometimes actually make cash flow problems worse following sales growth, a process referred to as cash flow squeeze. With every sale there are costs associated which may be immediate. Thus more sales may only result in a worse net position due to extra costs but no extra income.
4. Use Your Data, Not Your Gut
It’s easy to be overly optimistic about your business but be careful to not underestimate how quickly cash flow can get out of hand. Use the cash flow position to make your business decisions rather than impulse. It might be worth considering a subscription to some online cash flow software or engaging the services of a mentor to get expert advice.
5. Pay Attention to Terms
Your payment terms should be focused around ensuring adequate revenue is coming into the business to cover costs effectively.
Payment terms should be clearly stated on your invoices and have a system to follow-up any late accounts. Offer a range of payment methods to make it as easy as possible for your customers to pay you.
A carrot and stick approach for your invoices can also be effective. A small discount to show your appreciation to customers who pay sooner, or a reasonable interest charge to those that go over the payment terms.
Take Care of Cash Flow and it Will Take Care of You
Cash flow issues can be the beginning of the end for a business and so should be carefully monitored. Failure to plan is one of the most common causes of cash flow issues. Once accurate forecasting is being done, this results in better business decisions and therefore improvement in the cash flow. Business growth is determined by cash flow. By doing cash flow forecasts, avoiding factors that worsen your cash flow, and making data-driven decisions, you will get your business to a strong financial position.
