Cash flow is the most important thing in your business – more important even than profit. If you imagine cash to be the blood cells of a business, then cash flow is the flow of blood, keeping the business alive.
A healthy person will quickly die without blood. And a healthy profitable business will quickly die if it runs out of cash.
It means while you must always be focused on building a profitable successful business, you must also keep a wary eye on how much money you have in the bank and what is happening to your cash flow.
It’s easy for things to quickly go wrong, especially during tough economic times. It only takes two or three customers to pay their bills more slowly than normal and you can find your bank account empty despite the fact your sales are good.
Here are the five most effective ways to improve the cash flow of your business quickly and efficiently:
Know what cash you will have in the bank
This is another way of saying you need to forecast your cash flow. What you do today may have an impact on your bank account in 30, 60 or 90 days’ time. So get in the habit of recording every sale and purchase and anticipating when it will hit your bank account.
A simple spreadsheet will show you how much is due to go into your bank account in a month and how much will come out.
A negative cash flow is where more goes out than comes in. In this situation, you will need to top up your bank account in some way or arrange an overdraft. It’s better to know the problem is on its way than try to deal with it the day it happens.
Credit check customers and set clear expectations
It’s tempting to sell anything you can to anybody, especially in your first few years of business. But in reality, the trick is to ensure that whoever buys from you wants to pay and CAN pay. The only way to guarantee this is to ask for payment upfront.
If you can’t do that, then get in the habit of credit checking customers. It’s normal practice these days and no business should be offended.
This guide explains how you can use ‘Credit Limit Application Forms’ to check new customers.
Making a sale for the sake of it just isn’t good business. It’s much better that you don’t waste time and resources supplying a customer who could never pay. When you do invoice customers set very clear expectations about when you expect to be paid and how (for example a Faster Payments bank account transfer is the quickest way to get money in an account).
Put in place a solid system for chasing invoices that are overdue and don’t be afraid to use it. The people that politely shout the loudest tend to get paid first.
Constantly trim costs
This doesn’t mean being ‘tight’, or badgering your suppliers every week for a discount. But it does mean looking at where your money is going and asking yourself if it’s the best use of resources.
For essential services where you don’t need to buy a specific brand such as electricity or stationery, shop around. Just a few pounds saved a month soon adds up.
For all other suppliers have a review of costs every 6 months. Smart suppliers understand that it’s more expensive to acquire a new client than retain one, so don’t be afraid to ask existing suppliers for a discount to stay with them another 12 months.
Prioritise who needs to be paid first
Staff must be top of this list (as the business owner you should be bottom), with key suppliers just underneath. If you need to buy in resources to make sales you must always keep suppliers happy. Good customers get additional benefits, especially when times are tough.
For other bills look at how long you get to pay, although it’s good business practice to always pay bills by the date they are due.
Historically, HMRC was one creditor that you never paid late. However, the Payment Support Service (PSS) – set up in 2008 – aims to support businesses who are concerned about their ability to pay.
If you’re worried about being able to meet any tax, National Insurance, VAT, or other payments owed to HMRC, you can ask for your payments to be deferred via a Time to Pay arrangement. This could help to get you through a temporary cashflow problem.
You can find out more about the PSS here.
Be wary of growing too quickly
There is a condition called overtrading, which can quickly scupper a business that’s growing fast. It’s where you are selling so much business that you run out of cash to buy the resources to deliver it.
This is another area where forecasting will allow you to manage the situation before things get out of control and you run out of cash.
If you can see a cash flow problem approaching you will be able to manage the situation and stop it from becoming a critical issue by either borrowing money or slowing down your growth.