Cash flow is the lifeblood of any small business, so it is essential that small business owners understand how to how to keep theirs healthy.
Cash flow problems are cited as the most common cause for businesses going under. This can seem like a worrying statistic, but it need not be.
Cash flow management is not rocket science and if you can get the basics right, you will be in a strong position.
Credit Control
Start your cash flow strategy with credit control. Invoices should be raised in a timely manner and payments followed up. Put basic procedures in place to stay on top of due dates and customer payments and apply those procedures consistently.
Ensure that your payment terms are clear and that you have fixed credit limits for customers which they are made aware of. Frequent bad payers should not be offered credit.
Sales Forecasting
A business can predict cash flow peaks and troughs by incorporating sales forecasting into its cash flow strategy.
When forecasting sales, business owners need to think about the market in which they operate, and their position within it. This can involve competitive analysis and analysis of price points within that market. A review of broader economic trends can also be an important factor in determining demand.
Cash flow can be managed accordingly.
Utilizing Cash Flow Efficiently
As part of the cash flow strategy, business owners should aim to make the most of their cash flow.
Regular cost cutting exercises ensure a business’s cash flow is being used wisely. By scrutinising all items brought, you can monitor your business’s cash usage as well as the value it gets from suppliers.
Evaluating what is spent and where it is spent is a great way to focus on the essentials and cut back on unnecessary costs.
Managing Liquidity
Another requirement of a healthy cash flow strategy is ensuring adequate liquid cash is always available, should you need to use it.
Payables Payment Terms
Good terms from suppliers can help to regulate a business’s cash flow.
Negotiating sixty or even ninety days to settle bills helps a business reduce pressure on payments and maintain positive cash flow.
Remember, large orders represent negotiation opportunities, and setting up a regular payment is better than paying the outstanding amount all in one go.
Efficient inventory management
Keeping tabs on your stock to cash ratio can ensure cash is in healthy supply.
Monitor stock closely to avoid ordering more than is needed.
Keep your income steady by working out what sells quickly, and do not tie up funds in slow moving stock.
Conserving cash by thinking ahead
Even when business is booming, it’s still important to think ahead.
Approach investments like new equipment with caution and try to conserve cash. If you’re buying assets, its worth asking for a finance deal over a year or even taking out an overdraft.
And again, no matter how well a business appears to be doing, always exercise vigilance.
Comment
Sound cash flow management is the best way to spot cash flow problems before they arise. A fall in sales, increasing aged debtors or late penalties from the HMRC can be red flags. Incorporate regular reviews of cash flow can help ensure that you are not caught out. Contact our expert, Simon Speller