The one resource that a small business cannot function without and that is cashflow, it is, in essence, the life blood of the business.
It keeps suppliers paid, the business stable and employees happy.
However, one of the number one causes of a small business going bust is the result of poor cashflow management.
Whether that be through not generating enough sales, income or through just managing the amount of expenses the business takes on.
During this article we will walk through some of the pointers you can implement into your business to begin managing cashflow effectively.
Understanding the basics
The first port of call, as with any skill, is to understand the basics, that is the amount of money you have coming in vs the amount of money you have going out of the business.
A positive cashflow position means that you have more income coming in and are therefore in a position to invest in the business, save for an emergency fund or rainy days.
A negative cashflow, however, is the reverse of this, it means you don’t have enough income coming in and this can lead to an enormous financial strain.
To get started, consider the following terminologies to help you get a clear picture of your businesses financial health:
- Operational Cash Flow: Money generated from sales or primary business activity;
- Investing Cash Flow: Money that is tied up in investments, stock, equipment purchases etc;
- Financing Cash Flow: Money that comes from external sources such as loans or investors.
Cashflow Forecast
One of the major tools in a business owners arsenal is the ability to predict, with some degree of accuracy, future cash flow. To do that you’re going to need to put together a cash flow forecast.
Most accounting applications such as Quickbooks or Xero will come with a cashflow tool as standard, however, you can create your own using excel.
Here’s how to produce a cashflow forecast for your business:
- Step 1: List all of your predicted income this ideally should be sales
- Step 2: List all of your expenses, money flowing out of the business for rent etc
- Step 3: Identify the gaps to predict cash shortfalls
Forecasting your business revenue can be both short term and long term depending on your business and requirements.
If you’re just starting-up, a projection of your cash flow gives you a baseline on where you believe the business should be.
Get paid quickly
One of the main problems start-ups and small businesses face is getting paid on time. It is a topic that has long been shared in both the media and debated by the UK Government.
Getting paid promptly for your services helps to ensure good positive cashflow and keeps your business in the black.
Here’s a few things to try and increase getting paid on time:
- Invoice Promptly: If you’ve done the work, invoice immediately on sign-off or on dispatch of the goods. Delaying your invoicing, means delays to payments.
- Offer incentives: Some small businesses offer incentives such as a discount (2-3% is adequate)
- Automate chasing: You’ve got better things to do than chase debt, setup an automation tool to chase those late payments.
- Payment Terms: Be strict and ensure you communicate what you expect, make sure your invoice has these terms shown.
Control Your Spending
As a business owner it can be very tempting to think, especially during the good months, to go out and spend, lavishly on that new printer or signing up for that 3 year contract with that advertising agency.
There is just one problem, spending lavishly in the good months can lead you to short falls when business is a little quieter, and all industries have quiet months.
You can control your expenses by:
- Understand the difference between fixed and variable cost: A fixed cost is something that is consistent each month i.e. your rent. Variable costs, are the opposite they go up and can include things like your stock.
- Negotiate: Business is large and part about negotiation, negotiating on price is a must.
- No luxuries: In a businesses infancy we hate to say it but the stand-up desk is going to have to wait. Cut your costs, look at where you can reduce costs this can include shopping at a cheaper supplier, cutting office supplies or cancelling unused subscriptions.
- Rainy day fund: Your personal finances have a security fund, so should your business, start by putting aside 1% every month from all of your income to help your business during slower months.
Cash Reserves
Point 4, above, leads nicely into organising a cash reserve.
Your goal here is to build an emergency fund, that should your business fall onto hard times, will help your business cover its costs and get you through that slower period.
Our tips:
- Aim for 3-6 months of expenses:- From the beginning of your business aim to put aside enough income to cover your expenses. 3-6 months worth should be adequate
- Separate bank account: Setup a separate account with another bank, don’t have a debit card for it and send your 1% to the account, build up your reserve slowly.
Carefully consider credit
Look, no amount of financial planning can prevent all problems, however, when things go wrong we don’t really want to rush to our nearest credit provider and request a loan, especially if the terms aren’t favourable.
Always, always take advice before diving into securing credit for your business and consider the implications on both the business and potential personal assets.
Types of credit available:
- Overdrafts: Business bank accounts will offer an overdraft, however, this is an expensive form of borrowing and is only ideal for short term cash flow issues.
- Short term loans: Only borrow what you know the business can afford to repay, often these come with interest but they will be lower than the amount of interest you will pay on an overdraft. In most cases the bank or credit lend will also require a directors guarantee which will mean that even if the company goes bust, you’re still liable to repay the debt.
Always ensure you carry out a full assessment of your business and personal finances before making any decision on borrowing funds.
Summary
When it comes to small business, cash flow is king, and we’re talking the king.
No cash means no income, no income means no business and if you’re a business owner relying on your business to put food on your table, no income means you’re in trouble.
Implementing some of the above strategies can help ensure you have a healthy cashflow, the number one form of income for any business is sales.
Monitoring your cashflow on a monthly basis is going to help get you in the mindset of knowing what is going out and when you’re likely to need more income.