Cash flow is the lifeblood of any business.
Without cash on hand, you won’t be able to pay your rent, your people or your suppliers – even if you’re profitable and growing. In fact, a phase of rapid growth is the most dangerous time for your cash flow, as you will need to hire new people and buy raw materials to serve new customers – weeks before they pay you.
So how can you minimise the chances of suffering from cash flow problems?
1 Cut your expenditure
This may sound obvious, but if you can renegotiate your lease, switch to a more appropriate mobile phone plan or change to suppliers offering better deals then you will be able to slash your costs and increase both your profitability and your cash on hand.
2 Pay attention to your accounts
There are so many things to think about when running a small business that some entrepreneurs take their eye off their bookkeeping. Whilst this is understandable, it’s also very dangerous.
If you don’t know how much money you have, there is a high chance that you will run into cash flow problems.
3 Create accurate financial projections
Knowing what you have is only half the challenge. You also need to know what you’re going to spend and more importantly, when. By creating an accurate cash flow forecast which will record when your bills fall due and when your customers are likely to pay you – you will be able to predict if and when you are likely to encounter problems, giving you time to do something about it.
4 Collect your debts on time
Often, cash flow crises occur because a company’s customers are paying slowly. Make sure your clients adhere to your agreed terms of business, and if necessary incentivise them.
If your customers are habitually slow to pay, you could consider a small discount for faster payment – let’s say, 5% off for paying within a week – or charging interest and fees to those who fail to meet the due date.
5 Pay your suppliers at the last possible moment
Whilst paying suppliers quickly can cement their loyalty, it isn’t always feasible.
In particular, if you have slow-paying customers, then it can unnecessarily strain your cash flow for several weeks. Carefully examine your suppliers’ terms of business and schedule your payments for the last possible moment.
If you’re already experiencing cash flow difficulties, see whether they will modify their terms for you or allow you to pay late – they’d almost certainly rather be paid in arrears than risk not being paid at all.
6 Control your growth carefully
As already stated, a period of rapid growth can be particularly risky for any business.
Whilst every company wants to grow, it’s important to ensure that you don’t get ahead of yourself and grow so fast that you can’t pay your bills. What you’re looking for is growth that’s steady and sustainable – so your company will be around for the long term.
7 Have finance on hand
Even if you pay attention to the above issues, you’re almost certain to encounter a negative cash flow once in a while. Unless you have substantial cash reserves within the business, you’ll need a source of finance to overcome it.
An overdraft or business line of credit can be a good way to borrow, with interest only being payable when you actually draw down the finance. Or if you encounter a sudden crisis, an alternative lender may be able to provide you with an emergency loan and have cash inside your account within 24 hours.
8 Consider factoring and invoice discounting
Invoice factoring or discounting is an excellent way to tame a troublesome cash flow for good. These innovative solutions allow you to borrow the vast bulk of your invoices as soon as you issue them, with repayment being made when your customers pay you.
With factoring, the finance company takes over your debtor ledger and assigns experienced credit control professionals to ensure early payment, whilst with invoice discounting you retain control of your own debtors.