Small business owners contend with a host of problems every day- most notably cash flow or lack of it. Whether your business is growing or struggling, managing your cash flow is absolutely essential to business survival.
Here are eight tips to consider when planning how to deal with the ups and downs of cash flow.
Remember the difference between profit and cash
Start-up business owners who understand the difference between profits and cash are one step ahead of the start-ups unaware of any difference between the two. Unfortunately profits do not pay bills. If a small business owner continues to pay his creditors whilst not receiving the money owed by its debtors, the business will be spending more money than it takes in resulting in a negative cash flow. The fact remains that a profitable company can go into liquidation because it has run out of cash.
Set a cash flow budget
A cash flow budget should be prepared for the next 12 months and reflect the actual money movements from month-to-month.
To estimate your sales, consider factors such as last year’s profit and loss statement and factor in any large one-off sales. It’s important to plan for different outcomes, and consider best case and worst case scenarios.
If you are finding it difficult to predict your sales, complete all the outgoings first, and then see what sales you need to cover your outgoings. At least then you have a known target.
Be sure to review this budget regularly. In doing so, you are able to plan for any events or demands on your cash flow before they become a pressing issue.
Avoid big expenses
This will depend on the industry your business is involved in however, it’s often better to start small and build your business up gradually. With the help of your accountant, determine whether it’s better to avoid large fixed costs (eg rent and outgoings & associated costs) which will tie up your capital for long periods and mean outlaying large sums of cash. It may also be worthwhile considering if leasing is a better option than buying for various items of plant and equipment.
Invoice as soon as possible
Many small businesses often wait till end of month to prepare and send off their invoices. This is a lost opportunity for possible cash flow inflow. Invoicing as soon as the work is completed means that you are more likely to be paid sooner.
Issuing your invoice by email will mean it will get there immediately and you will have a record of the email being sent.
Ask for a portion of payment up front
For large items or projects, ask your customers to pay in advance or for a deposit up front.
Pay bills on the due date, not before
There is no reason to pay your bills before the due date, unless the supplier is offering you an incentive to. Online banking has made paying your suppliers on a certain date quick and easy. Get into the habit of making online payments and transferring the funds on due date of the invoice. You can do this by selecting the future payment date when selecting the supplier you would like to pay. This allows you to have cash on hand for longer periods of time.
Technology has made it much easier to manage cash flow. Cloud based accounting tools such as QuickBooks, Xero and MYOB can simplify cash flow management by tracking when receivables and payables are due.
Have a line of credit
It’s always important to have a back-up plan. Having a small business line of credit is helpful for business that occasionally encounters cash flow issues. For businesses that are seasonal, a line of credit is imperative. The best time to arrange a line of credit is when you don’t need it. Remember, only resort to using a line of credit if you have no other option.
Always be on the lookout for ways to improve your cash flow. What works for one business owner may not work for another - even more so if you operate in different industries or target different markets. Keeping on top of your budgets will help you anticipate for any changes that need to be made.