The importance of cash
Cash is the lifeblood of any business. Although success is often measured in terms of revenue or profit, it’s the amount of hard cash in a business which tells the true story. Your business may be heading to make a profit in the long run, but if you don’t have enough cash here and now to pay your bills, you’re going to fail pretty quickly.
In order to avoid this happening, it’s important to remember the basics – good cash flow management is straightforward, and boils down to having more cash coming into your business than you have going out. It also needs to come in at the right time, so you can pay your suppliers and purchase new stock.
Make sure you keep on top of your cash levels – get in the habit of checking your cash flow on a daily basis, or at worst, once a week. You might have done this in the early days of starting your business, but as it’s grown or you’ve taken on more staff it becomes increasingly difficult to keep track of all your expenditure. After a relatively short period you can start to lose visibility of your costs, and various inefficiencies begin to creep into your systems meaning that you end up wasting money.
Top ways to manage your cash flow
There are few simple measures which you can put in place to help you regain control of the cash in your business.
Assess your current outgoings
Run an internal audit of your current expenditure, and examine all your individual costs. Include your large outlays such as salaries, rent, stock and software subscriptions, but don’t forget all the smaller payments such as travel, stationary, postage and office refreshments. Gain an understanding of exactly what you’re spending and how often you’re spending it, and set it out in a format which enables you to highlight areas for improvement. Make comparisons with the previous year, and if costs have increased dramatically, try and establish why.
Reduce your expenses
It may sound obvious, but cutting down unnecessary expenditure on the ‘nice to haves’ is the simplest way to improve your cash flow. Think about every item you’re about to purchase, however small, and whether it will actually make a difference to your business success. Try not to spend a fortune on unnecessary quantities of stock which you may then take months to sell.
This is where using cloud based software such as Xero or Quickbooks comes into its own. It can make it easier for you to track and control your expenses, so it becomes a habit to report on them more regularly.
Manage your credit control
Making sure you get paid on time is one of the best ways to keep control of your cash flow. Check that you always invoice promptly, with clearly laid out payment terms, and that you offer a variety of simple and quick ways to pay. It helps to use cloud software so you can track when an invoice has been opened and read. If you have customers making regular payments, try to set up a direct debit or standing order with them.
Challenge your suppliers
Make sure you shop around for the best deals for your business, just as you would at home. You may have come to rely on regular suppliers, but why not challenge them to match cheaper quotes you can get from elsewhere? If you decide to stick with your current supplier, ask them if it’s possible to pay in instalments or make your payment terms more flexible. Don’t shy away from negotiating hard in order to get the best deal for your business, particularly for those services that have the potential to cost you a lot of money over time.
Get staff on board
Get your staff on side by explaining to them the importance of controlling business cash flow, and ask them to support you in making this happen. If other members of your team have control over making purchases for the business, make sure you can rely on them to help you with budgeting and with avoiding any unnecessary spend.
Before you begin working with a new customer, find out as much as you can about them so that you can assess their reliability for making payment. It’s a good idea to run a credit check on a prospect before doing business with them to rule out any uncertainty. It will flag up their financial performance, their credit score and also how quickly they pay their suppliers. If their credit history looks a bit dodgy, it’s probably better walk away and save yourself the headache – but if you do decide to run the risk then at least you’re forewarned.
Future-proofing your cash flow
Once you’ve got your cash flow under control, you need to keep it that way!
Look back at your past sales and ascertain any patterns which emerge, as this is an excellent way to prepare for what’s ahead. But don’t forget to look forwards and consider the upcoming business climate – if you’re aware of a new player in the market, or seasonal holiday influences, or economic uncertainty, then take this into account when establishing future demand.
Putting a plan in place helps to alert you to any anomalies or bad habits as they creep in. If you review your costs every quarter, and keep asking ‘Why are we paying for this?’, then it stops you wasting money.
Communicate with your bank
It’s important to maintain a good, solid relationship with your bank manager. Try to keep in regular contact with them, and ensure that you’re clear and honest in your communication. If you can demonstrate that you have a comprehensive set of business reports and financials then these will reassure the bank that you’re fully in control. This will serve you well if ever you need to extend your credit levels or apply for finance.
Upsell to existing clients
Keep your sales flowing by encouraging repeat purchases from customers, maybe by offering a discount if they place a regular order. Promote the wider range of your offering to existing customers, and make recommendations based on their purchasing history. Try running special promotions to your most valuable customers to increase customer loyalty and encourage referrals.
Getting the cash flow of your business onto a consistently even keel can be tricky. It’s a constant balancing act knowing how much you can risk spending in order to grow your business, versus how many sales you can guarantee generating in return. And don’t forget to keep an all-important cash buffer, to help you survive any quiet periods. At the end of the day it’s a matter of trial and error, but it’s important to remember that although you can live without profit, you can’t live without cash.
If you would like any help with creating a sales forecast or cash flow projection for your business then please get in touch with the PT team and we’ll be happy to help.