7 Tips To Avoid A Cash Flow Crisis
Keeping track of what money is coming in and going out of your business is essential. Whilst cash flow and profits are both crucial aspects of a business – they should not be confused as they’re not the same.
Cash flow vs. Profit
The difference between the two is the difference between success and bankruptcy. Cash flow is the movement of money in and out of a business, the key is to always ensure there’s enough cash to pay for expenses when they are due.
It can be increased by selling more goods/services and reducing costs etc. A company can be profitable but still go bankrupt from cash flow problems, equally, it can also have great cash flow, but not be profitable. If a business cannot pay its suppliers or workers it is insolvent. The owners must either raise extra finance or cease trading.
However, by soaking up the following tips, you’ll be able to save your business from this potential disasters.
Keep a cash flow forecast
Planning ahead and drawing up a cash flow forecast is so important, as it identifies when the firm might need an overdraft. The most basic way to set up a cash flow forecast is to keep a simple spreadsheet listing income and costs on a monthly basis (taking note of seasonal variations) and factoring in fixed and variable costs to your cash flow forecast.
Be realistic and include every item.
Keep on top of payments
As obvious as it may seem, many small businesses neglect to keep a track of their customer payments and invoices. Get to know your customer payment dates and be quick to chase any overdue bills, don’t ever ignore any irregularities or delays.
Just as you should also send out invoices promptly – it’s worth setting clear payment terms with your suppliers from the start of your business with them, 30 days is the standard.
Stay on top of stock management
Efficient stock management is just as important as managing cash flow. We recommend reconciling your stock records at the same time as your bank account – whether weekly or monthly. You will then have a clear notion of what needs reordering and avoid holding too much stock.
Stay friendly with lenders
There will come a time where most businesses will need a cash boost, in the form of credit or overdraft, from a bank or a lender; particularly if they’re just starting out. Stay on good terms and develop a relationship, based on trust, with banks and lenders and they’ll be more likely to treat you favourably should your business need financial assistance.
Be honest and build trust by keeping them informed on any unforeseen outgoings or changes in forecasts.
If your business is growing rapidly and you think you’ll have trouble to meet your overhead expenses – you could seek access to a line of credit such as an overdraft or a short-term loan.
Banks are more willing to lend to a business if they can see some sort of proof that you will be able to repay your debt, this could be a letter of intent or a draft service contract.
Tighten up on your outgoings
Assess your business outgoings by looking at your fixed and variable costs, i.e. suppliers, tax bills, utilities and so on. Where possible, use your powers of negotiation to strike deals favourable to you and your business, or, try and pay in instalments or somehow make terms more flexible.
Also, in particular, keep an eye on those little purchases that can really add up.
Anticipate problems before they happen
Last but not least, in a business environment circumstances are always changing. It’s in your best interest to monitor your cash flow forecast, market conditions and keep an eye on customers and suppliers who may be in trouble, then taking action as soon as you see a problem.
If you’re worried then talk to an accountant who can take some of the workload of your shoulders and help you manage your business more efficiently.