Money is the lifeblood of any business. That much should be obvious to anyone with a head on their shoulders. However, given the importance of bringing revenue in, most businesses owners, especially when starting out, tend to go over board, fixating on turnover and profit, overlooking cash flow to their own detriment.
This is, of course, understandable, but it is also a flawed way of thinking. To go back to the earlier analogy, if income is the ‘lifeblood’ of your business, then cash flow is the system of veins and arteries that keep it circulating. Even if you are bringing in good money, poor cash flow can topple your business.
Here are some top tips to avoid such a fate:
Be Prepared for Growth
Your business is expanding? That’s great! But think ahead. What will this do to your cash flow? If you are taking on more employees, or moving to a bigger premises and paying a higher level of rent, for example, more money will be going of the business each month, upfront.
Obviously, you can afford to do these things, or you wouldn’t even consider them, but it’s not a question of whether or not you can afford them, it’s a matter of when you can afford to pay.
Despite this, many businesses owners simply see that they are making money and proceed to take on extra costs of this type, only stopping to ponder how it’s affected their cash flow after a problem arises. You need to be prepared.
The best way to do this is to know how your monthly cash flow stands from the very start. This way you can factor new costs into the equation and adapt to them as they arise, rather than finding yourself in a mess that needs total reorganization to fix.
Be More Stringent With Credit
Whilst offering looser credit agreements with customers and clients may give more people the chance to buy your product, if you view debt as an expense, then it can also cost your business.
Being tighter with credit arrangements for customers should result in more people paying you up front and increase the level of cash on hand in your coffers.
You may wish to apply the same tactics to your businesses clients, though obviously depending on your relationship with them and how dependent your enterprise is on their purchases, you may want to exercise caution in attempting to gain payment quicker.
Of course, that said, there’s no need to let payments slide longer than need be. Make sure your systems for invoicing and collecting payment are working as effectively as possible. After all, when it comes to getting payment, the onus is on you. You need to be aggressive in following up outstanding payments, and you need to start doing so the moment they become late.
As prevention is better than cure, you can encourage earlier payments buy offering discounts of between 1.5-3% for payment within 10 days, and introduce a late fee of about 2%.
Just as you want to bring cash into your business as quickly as possible, you want to try and keep hold of it for as long as possible. This obviously entails making all payments that you are liable for as late as you can, without incurring black marks on your credit (which may end up wrecking your cash flow in future, should you need to take out a short term loan to cover any big outgoings.) Be sure to partner with the right corporate banking institution that can help you in managing your payables.
In addition to this, you should seek to leverage increased flexibility from your creditors wherever possible. For instance, you may have a supplier who depends on your account for a large proportion of their businesses. It is likely they will be eager to keep your custom and allow you a more relaxed payment schedule.
Obviously, for businesses expenses such as accommodation and travel you are expected to pay upfront (it is unlikely you’ll be able to negotiate terms with an airline or hotelier!) But that doesn’t mean you can’t use credit to aid your cash management. Use a business card for such costs, and you won’t have to pay until 25 days after you receive your statement.
Gary Turner has a background in finance stretching back many years and his knowledge bridges both business and personal financial topics. His blog FinanceNet mainly focuses on the personal finance side of things with the occasional foray into business subjects.