As the owner of a small business, you’ll have heard countless times that cash flow is the most important part of a business’s finances – cash flow is king etc. etc.
That’s because it’s true.
You can survive for a while without profits if you still have cash to pay for supplies and wages, but as soon as the cash stops flowing, so does your business.
The best thing a small business can do to become successful is to manage its cash flow properly, and avoid a negative cash flow.
Cash flow forecasting
The most effective way to avoid any cash flow problems is to make forecasts.
You need to calculate your income and expenses and subtract one from the other. You can then extrapolate this to predict your finances in the future and plan accordingly.
Improving cash flow
Once you’ve performed a forecast, there are a number of things a small business can do to improve its cash flow.
Monitoring cash flow
Devise a system that allows you to see exactly when you need to pay another business, and exactly when another business or client needs to pay you.
This will also help you work out when to send reminders if payments are soon due, or late.
You should try to keep communication with clients as simple as possible to avoid confusion and delays.
This means making extra sure there are no mistakes on any invoices you send, and be quick in responding to any queries.
The quicker you send invoices to clients, the quicker they can pay you.
How to avoid cash flow problems
Most small businesses will occasionally find themselves with bad cash flow, but they’re also the type of business most at risk from having a negative cash flow.
Here are a few ways to avoid problems:
You could charge an upfront payment for goods or services.
Not only will you receive some of the money earlier, you’ll see the client’s ability to pay. If they can’t pay a small deposit, they won’t be able to pay the total.
You might even be able to keep the deposit if the deal falls through, if it’s written in the contract.
You could offer clients a discount for early payments, working out how much late payments cost your business on average to help decide how big a discount to give.
Look for flexible payment options
You might find that if you pay more for a service, you’ll be given the chance of having a more flexible payment option.
You’ll be paying more in the long run, but you’ll have more time to get the money together to pay.
Cash flow is more important than sales numbers
You might face a time when your small business’s sales start to grow quickly.
That’s great, but don’t let the good times be an opportunity for you to take your eye off the ball.
You still need to be vigilant when it comes to cash flow.
It doesn’t matter how much money is coming in – if more is going out of the business, you’ll face a cash flow disaster.
If you’re ever unsure whether a client will be able to pay, it’s easy to get a credit check on them if it’s a limited company.
If they have a poor credit history, you might want to avoid doing business with them.
Fixing cash flow problems
Whenever you do find yourself in the unfortunate position of having cash flow problems, you’ll need to act quickly to find a solution.
Here are a few ways to help fix cash flow problems:
Bank on good working relationships
If you have good working relationships with clients and suppliers, you could ask them to either make a payment earlier, or give you longer to pay them.
A client or supplier will be more willing to help if you’ve been working together for a long time, as it benefits them if you stay in business.
If you have multiple payments to be made, you need to choose which is the most urgent in order to minimise overdraft charges and late payment penalties.
You might not actually be using all of your assets, in which case you could sell them, or lease them if you want to keep them but earn an income from them.
For example, do you have an extra van that you hardly ever use and could do without?
Other sources of finance
If you have cash flow problems, banks may be unwilling to lend your business money, since they’ll think you’ll be unable to make the loan repayments.
There are, however, some other options. You could consider crowdfunding, peer-to-peer lending, or even lending money from a supplier, since it benefits them if you stay in business and are able to continue to buy from them.
Shoaib Aslam is the co-founder of Pearl Chartered Accountants, a UK-based chartered accountancy firm that has multiple locations across London. They are experts in helping startups and established businesses with all aspects of growth, strategy, scaling up, accounting and tax planning.