What exactly does cash flow mean and why is it so important to a business?
As the name suggests, cash flow is the movement of money into and out of a business. Money coming in from sales of products, or client fees etc., and money going out to pay suppliers, salaries etc. So the balance comes in managing this movement, you need to ensure you can pay your costs by bringing in enough business.
More outgoings than incomings are what can make a business insolvent and is one of the top reasons so many small businesses fail each year. There are a number of reasons why cash flow fails – it could be that there aren’t enough sales, but actually, it can be as simple as not properly tracking your cash flow, and having the foresight to anticipate potential shortcomings, and making provision for this in the form of cash reserves, overdraft etc.
Managing cash flow can be a bit of a balancing act, but is vital to ensure the health of a business. Here are 10 tips to help you make it as painless as possible:
• Cashflow template – definite number 1 on the list. You need to track how much money is coming in and out so you can see what’s going on, and it allows you to make decisions. Not only that, but you also need to try and forecast for the future too, so you know when you need to make provisions to save for potentially lighter months, when business levels might fall, and when you are able to put some money aside when business is going well
• Don’t wait for a certain day to do your invoicing – by waiting till the end of the month or the week, you’re delaying getting money in from clients. Invoice as soon as the job is complete
• Offer easy to understand payment terms to help you predict how much money is coming into the business each month. By charging a set fee each month, for example, rather than an hourly rate will also help your clients know how much they are paying on a monthly basis
• Offer easy ways for your clients to pay. Getting them to set up a Direct Debit, or using systems such as Go Cardless allows the money to come to you a lot quicker, and your client doesn’t have to put time aside to manage payment to you too. Win-win situation! (If you’d like to know more about Go Cardless, drop me a line, and I can show you how it works!)
• Think about additional revenue streams – if you know there are months in which your business doesn’t perform as well, think about how you can plan for that. For example, would it make it easier if you created an online version of the service you are selling, or a different product range that targeted customers in the winter if you sold ice creams? Whatever it might be, not having all your eggs in one basket could help with your cash flow situation
• Have an open conversation with your clients about how their payment systems work. For example, if your client only pays on a certain day of the week, or via cheque (so it will take longer to clear into your bank account), then you can plan for this, forewarned is forearmed!
• When making purchases, always look for ways that you can spread the payments, it can keep your cash flow looking healthier if smaller, more regular payments come out each month. Leasing, or paying off equipment can be a way in which to do this
• Be strict on chasing late payments. It’s not the nicest job, but actually, when you chase a client for payment, the majority of times it’s simply a case that they’ve forgotten. So, don’t avoid doing it, the consequences of late payments could be disastrous
• Think about offering a discount for early payment. This is a great incentive which saves the client some money, and get a healthier bank balance
• Outsource your cashflow! If finances aren’t your strong point, or you simply don’t have the time to keep on top of the incomings and outgoings, then it’s definitely worth handing this over to a trusty accountant. The money spent on someone managing this for you can be worth its weight in gold!
Give some of the tips a go, and it’ll give you peace of mind that there will be money in the bank when needed, and also in case of an emergency, such as a piece of equipment which needs replacing, for example. And don’t forget, if you are considering outsourcing this part of your business, then give us a call!