Four simple ways to manage and improve your cash flow
Is your bank balance keeping you awake at night? You should know you’re not alone! A 2017 study from Barclaycard showed that a whopping 63% of SME decision makers worry about their business’ cash flow. That’s a lot of sleepless people.
Cash is king in any business. We hear this expression over and over again but what does it mean? Let’s start by looking at what cash is not.
Cash is neither the value of the sales you’ve made nor your profit margin. In fact, it’s much simpler than either of those. Cash is the money you have in your bank account available to spend right now. You can make all the sales in the world but if you’ve not received payment for them then you have no cash to spend on your own business.
Cash flow is the movement of money in and out of your business. Have more moving out than in at any given time and you’re in trouble. Have the same coming in as you have going out and you’re surviving. But that’s all you’re doing. So it stands to reason that to thrive (and sleep well at night) rather than survive you need to have more coming in than going out. But how to make that happen?
Well – it’s not only about making more sales – though that helps. What’s important is that you get paid for those sales. You’ve heard the old adage about speculating to accumulate? In that vein, you might need money to first go out and make those sales happen. Here are four simple things you can do to improve the cash flow in your business.
1. Shorten your payment terms
How long do you give your customers to pay?
There are two types of payment terms:
• Those that you agreed with your customer in advance and that show on your invoice.
• Those that you allow your customer to take.
In the first instance, check that your agreed payment terms are in keeping with your industry. If they are much longer than the standard then pull them in a bit. If you’re offering thirty days but industry standard is seven days that’s twenty-three days’ worth of cash that you don’t have in your business that your competitors do. It’s also twenty-three days’ worth of cash in your customer’s bank account not yours.
With payment terms sorted put some structure around chasing for payment of your invoices and stick to it. Chase early and often and use the phone. Don’t hide behind email. If this is something that either makes you uncomfortable or you don’t time for then outsource it to a professional.
Finally, if you have that one big client who insists on longer payment terms make sure you have enough smaller customers on shorter terms to keep the cash circulating through your business. Take care not to neglect them in favour of the big client. Get out there and find more of them so you’re not reliant on the income from that one big client. As the saying goes, don’t put all your eggs in one basket!
2. Don’t bite off more than you can chew
While we’re talking in idioms, resist the urge to bite off more than you can chew. Taking on big orders is great, but you need to be able to fulfil them. And that may mean spending money before you can do so. Always consider your bank balance verses the cost of that sale. Can you meet the cost of that sale and still be able to pay all your other bills? Borrowing, such as using an overdraft, is an option but has a cost associated with it. Can you meet that cost? Is it built into the price you are charging for that big order?
Overtrading can kill a business with frightening speed as this LinkedIn article, Death by Cash Flow, by Declan Flood demonstrates.
3. Don’t spend the money before you’ve got it
It’s always tempting when you get a new client, to spend money you think you’re going to earn from them before you’ve even earnt it! Most small business owners have a shopping list as long as their arm for when they have the money. But remember, it’s not in your bank account yet so don’t give in to the temptation to spend it.
4. Have a cash flow forecast
It may not be as exciting as other things you could be doing for your business. But maintaining a cash flow forecast and tracking actual cash flow against it is an essential tool for any business.
You don’t have to make it complicated. A simple prediction of paid sales and all expenses that you expect to pay for the month (including PAYE or drawings) is all you need. Base your sales figures on when you expect payment not the point of sale. The difference between the money you expect to receive and the money you expect to spend is your cash inflow – hopefully not outflow!
Remember to factor in late payments when predicting cash coming in from sales. If a customer has always paid you late in the past it’s dangerous to base your cash management on the assumption they will pay on time on this occasion!
You then need to compare your forecast to the actual payments received and payments made for the month. Monitoring the actual cash in and out allows you to create more accurate predictions for future months.
The example below shows how, even with a positive cash flow forecast, a negative cash flow resulted.
You can use this to look to see if you’re spending too much in a particular area, and if you need to tighten up your credit control processes or if sales of certain products or services are underperforming.
Don’t only forecast for the immediate month ahead. Create your forecast for the year ahead and keep it up to date. This will help you to plan for growth and larger expenditure.
With all that in mind I venture to suggest that the ‘Cash is King’ expression would work better expanded to ‘Cash flow is king in any business’!
If you’d like help getting your cash flow back on track then get in touch to set up a free, no obligation call.