How to protect your cash flow following challenging times
Cash flow is king in all businesses, but for small businesses, when times are tight and cash is expensive to borrow, it’s more important than ever to be in control of your cash flow and plan for the future. We take a look at why managing cash flow is important and how you can go about managing cash flow in a small business.
Why is managing cash flow important?
One of the things that can seem strange when first starting a business is that even if your business is making a profit, it can still end up in trouble through lack of cash.
Whilst profit is important, knowing where your break-even point is will help you to manage your business and ensure long-term growth and success. Even so, breaking even is not the key factor in the day-to-day running of a business because it exists on paper rather than in the bank.
By adequately managing cash flow in your small business, you ensure that you have enough in the bank to be able to afford to pay your suppliers, your staff and yourself. If you have more money leaving your bank account than arriving into it for any sustained period, you will not have the available cash flow to make critical payments.
How can small businesses protect their cash flow?
There are a number of ways to manage cash flow in a small business to allow for greater protection. Some of these include:
Keeping a cash flow forecast:
A cash flow forecast is important. It predicts how much cash will be available to the business at any given time and is usually based on projected sales versus projected costs. Based on this forecast you would adjust your expenditure to ensure that the amount of cash in the business is not depleted, whilst focusing on controlling debtor days (the speed at which your customers pay you). The better you can forecast the sales, limit expenditure and control collection the more robust your cash flow will be.
Credit insurance protects against bad debt and debtor insolvency. If a customer doesn’t pay your invoice the insurance will cover any goods or services you have supplied in line with designated credit limits.
Managing creditors and debt collection:
Keep on top of monies owed to you by your customers by placing an expectation on them from the start about their payment terms and then using reminders and regular chases. Use a set of standard criteria to judge whether to allow credit and enforce those standards to protect your own interests.
There are ways of encouraging clients to pay faster using incentives, especially useful if you have customers who are regularly letting you down but you do not want to remove or reduce their credit. If you can’t do debt collection internally there are external debt collection services that will assist with late payments and bad debt. Outsourcing your credit control can improve collection times and debt collection agencies can also be tasked with recovering outstanding invoices from non-payers.
Negotiate good terms with your suppliers by making your payment timescales as long as you can in order to maximise the time you can hold onto that cash and collect your own debt. However, be aware of any penalties for late payment; don’t increase your outgoings by overextending a supplier’s goodwill.
This is basically borrowing against unpaid invoices. Once the invoice is sent to the customer you have access to an amount of the invoice value – although usually quite an expensive service, it greatly improves cash flow.
Keeping accurate and up-to-date records will help you to keep on top of your cash flow. Accountancy software has facilities to help you with managing cash flow in a small business so make the most of it to keep the administrative work to a minimum and allow you to focus on the day-to-day running of the business.
Challenging times or not, managing cash flow in a small business will not only help you to stay financially viable and in control of your destiny, but it will give you peace of mind and a feeling of security. When times are tight and your cash is depleted it can be worrying, and although it can seem easier to bury your head in the sand, the reasons covered in this article are exactly why managing cash flow is important; it will give you the best chance of ensuring your business succeeds in the longer term.