When running a successful business, effective cash flow management is vital to ensure you have the funds needed to continue trading and grow your business further.
If business is slow for a while, do you have enough cash to survive until things pick up?
What is ‘cashflow’?
Cash flow in simple terms is the balance of money flowing in and out of your business. This is made up of the physical payments of money, rather than what you are owed by your debtors or what you owe to your creditors.
If you sell products or services on credit, your cash inflow is delayed until you are actually paid by the customer.
We have put together the following 6 tips to help you manage your cashflow…
1. Keep an eye on your funds
As a business owner it’s important to always keep a careful eye on your business’s cash flow, you should always know what is coming in and going out.
Make sure that all systems are kept up to date and use software to help you predict your cash flow. This will help you keep control of your finances and deal with any potential shortfalls before they become an issue.
2. Prepare cash flow forecasts
Looking ahead will give you warnings of any dips in cash flow so that you have plenty of time to prepare. Investing in good accounting software makes it much easier to prepare budgets and forecasts as you can quickly update projections and make calculations for the months ahead.
If you prepare cash flow forecasts on a monthly (or weekly) basis you will be able to identify any major outgoings, such as the monthly payroll or contract renewals, and make sure you will have sufficient cash flow to cover the payments.
Be realistic when preparing forecasts and use previous figures for sales volumes, debtor periods and any bad debts. When including new products or customers in your forecasts be pessimistic – expect problems and delays, and don’t include sales in cash receipts until the invoice has been paid.
3. Use the forecasts
Preparing regular cash flow forecasts is one thing, but it’s important to make sure you use them to monitor actual performance against budget and cash flow forecast.
Comparing your performance with the budget allows you to quickly see whether sales and profits are going to plan, identify any problems, and take immediate action.
By using forecasts, you can check you will have enough cash before you take on any large financial commitments such as new equipment or major new orders.
4. Regularly review pricing
If you are thinking of increasing prices be aware that whilst this may reduce sales (and therefore cash flow) in the short-term, over the longer term you should see a positive impact on profitability and cash generation.
During times when you need to improve cash flow temporarily, try bringing forward sales by offering incentives to customers purchasing quickly or paying early.
5. Practice efficient credit control
Having an efficient credit control system will save you time, speed up your cash collection, and help to reduce bad debt.
Setting reasonable payment periods can help to make sure you receive payments on time. The maximum payment period is 60 days from date of invoice or 30 days where no period has been agreed.
Send out invoices to customers immediately after supplying the goods or service and don’t be afraid to make a follow-up call to confirm that all the invoice details were correct and the customer will have no problem paying it by the due date.
Regularly monitor and chase late payments. Pursue largest debtors first and remember that you have a legal right to charge interest on late-paying business and public sector customers. Using a debt collection agency, or a specialist solicitor, can be an effective method of dealing with non-payers.
6. Control expenditure
Be savvy with your spending. Shop around for the best deals and ask for better terms from your suppliers.
You might be able to make savings by purchasing some types of capital equipment second-hand such as printers or computer equipment.
Check for where savings can be made such as unnecessary costs like heating your premises at night, or high-priced services that can be sourced more cheaply.
Effective stock control can free up significant amounts of cash. Aim to hold just enough stock to service your customers and consider selling off any old or obsolete stock to free up capital.
For any advice on managing your cash flow, feel free to get in touch with us here at Magpie Accountancy.