A key factor of business success is having a solid awareness of what money is coming in and going out.
An important distinction to make is the difference between profit and cash flow. Your business could be generating high profit margins but if the cash is tied up in stocks or other assets and not freely available to pay suppliers or creditors, you could be putting your business at risk.
Follow these 7 tips to stay on top of your cash flow and avoid common cash flow problems:
1. Keep a cash flow forecast
A cash flow forecast is an easy way to keep track of your incoming and outgoing finances. You can create a simple spreadsheet to monitor your transactions on a monthly basis and use the forecast to set annual targets and make steps to prevent any predicted shortfall.
Use your forecast to identify seasonal trends, for example higher utility bill costs in winter. Be specific with all fixed and variable costs you might expect to encounter.
2. Keep on top of payments
It is good practise to be prompt to send invoices and to chase overdue bills in a timely manner. It is recommended to establish clearly set out payment terms with suppliers from the start, the standard term is 30 days.
Keep a record of your customer payment dates so you can identify any irregularity or delay that might suggest your customer is experiencing their own problems. Having a clear idea of when to expect payment for a product or service is key for keeping on top of your cash flow.
3. Stay on top of stock management
Knowing your stock levels is just as important as keeping on top of your cash flow. Try to establish a weekly or monthly routine to check your stock records as often as you check the company bank account. This will enable you to have a current awareness of what stock you have and what you need to order.
Being efficient with your stock control system will positively benefit your cash flow because you will only ever have as much stock as you need and won’t have your money tied into it.
4. Stay friendly with lenders
It is quite likely that a business will need to borrow cash from a bank or lender on occasion, particularly those just starting out, and might need credit or an overdraft to get up and running.
Establish a good relationship with your creditors and keep them informed of any unforeseen outgoings or changes in forecasts.
Being on good terms built on trust with banks and lenders means they’ll be more likely to treat you favourably should your business need future financial assistance. However, do be cautious when giving personal guarantees against any lending as this could put your personal assets at risk.
(Read our previous article: The Implications of Personal Guarantees by Directors and Why They’re a Bad Idea.)
5. Access credit
If you are winning new contracts and experiencing rapid business growth, you may be worried about having enough money to cover your overheads. The solution would be access credit from a bank or financier on a short term notice such as a loan or overdraft.
This option is often the best way forward for most businesses because banks will be more willing to lend on the basis of a draft service contract or letter of intent.
You will be able to pay off your debt once your client has paid therefore you will only need to pay interest to the bank or financier for the amount of time you actually need the loan.
6. Tighten up on your outgoings
Take note of how frequently you are making payments to your suppliers and utility bills and investigate the possibility of paying in instalments or on more flexible terms. Negotiate deals that would suit you and your business.
Keep an eye on all of your outgoings but don’t forget the smaller things you pay out for, these outgoings all add up.
7. Anticipate problems before they happen
Regularly update your cash flow forecast and keep an eye on the market conditions and on your customers and suppliers so that you can identify potential cash flow issues well in advance to be able to take action.
Don’t avoid your problems and hope they will go away. Efficiently manage your cash flow and you’ll be able to face any issues that might arise. If you have any concerns, then please speak to one of our experts here at Voscap. If you would like to seek business recovery advice, contact us today on 020 7769 6831, or email firstname.lastname@example.org, to speak to one of our business recovery specialists.