Cash flow is the net amount of money coming in and out of a business. It’s a company’s lifeblood and crucial to success and good health.
Cash flow is often the most significant indicator of whether a business will stay the course or fall short. There are varying statistics on how many small businesses survive their first few years, but sadly most won’t make it past five.
And while that can be due to a myriad of factors, poor cash flow management is perhaps the most significant contributor to sealing a company’s fate.
Here are seven steps your company can take to stymie the most common cash flow problems.
1. Overcome bad debts
Bad debts are those which a company struggles to recover. Problems with cash flow often stem from bad debts.
Getting credit control systems in place to collect any money that is owed from customers is an important step. It’s crucial to prioritise this, even if your business is still in its infancy and you don’t think it’s necessary – it soon will be.
Step one should be setting up a payment policy to speed up the cash coming into your business. Keep your payment terms short to make sure you get paid as soon as possible and list the terms on the invoice. Charge interest on those who pay late.
Credit checks on customers who are being offered lenient payment terms are a must. If a prospect’s credit record is poor, consider measures such as partial invoices or deposit requests.
2. Cash flow forecasting
Cash flow forecasts are one of the cornerstones of a successful company. Your accountant should be able to compile these for you. But, of course, the further ahead you plan, the more accurate your cash flow forecasting will be.
It makes it far easier to spot where your cash flow problems are – and where they are going to occur before they’ve even happened.
3. Organise your bookkeeping
There’s plenty of information out there on the initial start-up costs of a business, but very little about how many working hours you need to put into managing a new company. And if you’ve never kept books before, it can be challenging to plan the time.
Factors like this are often the root cause of cash flow problems. After all, how can you expect to be aware of any issues if your books aren’t up to date? Using a robust accounting system is the best place to start keeping books in order.
Your next step will be to generate useful reports to help you understand your company’s cash flow in simple terms.
4. Control your company’s growth
Cash flow problems can arise if a company grows too quickly. Growth is positive, but things can soon spiral out of control if they cannot keep up with it.
If you’re paying out hefty sums to keep up with the demand for your company’s services, your cash flow can get out of control without you noticing.
A bank overdraft or short-term loan will typically cover any shortfalls, and they are easier to obtain than you might think. Usually, showing a drafted contract or letter of intent to your bank will allow them to lend the cash your business needs to order stock in bulk or hire extra staff.
This means credit terms can still be offered to the customer, and the job can go ahead. The debt can then be repaid as soon as the customer has paid, so interest will only be paid on the amount of time you need.
5. Manage your stock
Holding on to the stock for too long harms your cash flow if you’re incurring costs by storing it. On the other hand, too little inventory can mean you can’t deliver effectively for customers and lose precious revenue. Finding the right balance is key to maintaining your cash flow.
6. Lower overheads
Fixed monthly payments coming out of your business account quickly eat into the revenue you’ve toiled so hard to generate.
Make sure your housekeeping is in order, and you’re getting the best possible prices for your overheads. Consider leasing vehicles to avoid tying up cash in assets and research the best deals on your utilities.
7. Keep an eye on your profits
If your company lacks profit, it inevitably leads to poor cash flow in the future, and consistent profit losses will ultimately lead to the failure of a business.
Businesses can survive without profit if they have cash reserves due to previous profits, but those reserves will eventually run out.
This gives you three basic options – increase the price, increase sales, or lower costs – or most likely a combination of two or three of these.
Choosing the right strategy depends on your business, and it pays to invest in expertise to help you figure out the correct route.
Contact the Future Strategy team today if you think your company is experiencing cash flow problems, and you would like some advice.