Don’t confuse profit with cash, a profitable business can fail because of a shortage of cash. Cash is the life blood of the business. If a business runs out of cash it’s at risk of insolvency, which makes strong cash flow management crucial.
Cash flow is simply the money coming in and going out of your business – if you have more money coming in than going out, you have a positive cash flow. To achieve positive cash flow or address negative cash flow, forecast your expenses and ensure you can pay your debts when they become due. In periods of negative cash flow (such as seasonally lower business periods), it’s vital the business is able to fund this shortfall.
Stay on top of your debts
Collecting debts is all part of owning a business, here’s some tips:
•Always specify a due date on your invoices – the sooner the better
•Follow up overdue customer payments immediately
•Issue invoices immediately you provide your goods or services, rather than weekly or monthly
•Offer discounts to customers for paying invoices early
•Consider requesting deposits from customers ordering larger or more expensive items or services.
Review your prices
It may seem daunting to raise prices, but it will help to address inflationary costs and protect your (all-important) profit margin. This needs to be considered in line with the market and your business’ value proposition but small price increases can potentially have a very positive effect on your business cash flow and profitability.
Check your assets
Is there any equipment your business could survive without? Selling unwanted assets improves cash flow, or consider leasing assets to help spread the cost over a longer period.
Watch out for overheads!
Regularly analyse expenses to help reduce or re-negotiate costs, or seek alternative providers. For example, changing to an off-peak internet plan saves you money while still servicing all your needs. Re-arrange the timing of your expenses or make provision for periodic payments for larger expenses to ensure they closely align to your cash flow.
Unused or surplus stock is a waste of cash which could otherwise be invested in your business. It’s important to stay on top of inventory, be aware of products that aren’t selling and think about discounting. Also, consider modifying the quantity and/or timing of your stock purchases to coincide with periods of higher cash flow demand.
Schedule your payments
Schedule when you pay your supplier invoices with when you receive payment of your customer invoices to avoid a disparity in your cash flow. It is always prudent to plan the timing of your payments to maximise your cash flow and ensure wherever possible you negotiate terms of trade that are favourable to your business.