Profit is good, but there’s no point in making money on paper if there’s not enough in the bank to pay the creditors knocking on your door. If you want your small business to be successful you need to pay close attention to the Cash Flow.
Ideally, you should have more cash flowing into your business each month than flows out. In reality, things are usually more complicated. An expected payment is delayed, several large bills arrive early, and your thriving business is suddenly in trouble.
Prevention is always better than a cure, and one way of spotting potential problems is to use a detailed cash flow forecast. When the forecast figures are significantly different from the actual sums received or paid they will highlight areas of your business that need adjustment. A qualified bookkeeper can help you draw up a forecast and alert you to pitfalls you might not have noticed.
But even the best run business can encounter cash flow problems through no fault of its own, so it also makes sense to ask some ‘What if?’ questions and know what to do in case of difficulty.
What if customers can’t or won’t pay?
This is probably the most common cash flow problem. Although you want to attract and retain plenty of customers, don’t let the promise of large or regular orders blind you to normal safeguards. If you offer credit terms, ask for and check credit references for new customers. Make sure your terms are clearly stated and stick to them. If you allow 30 days for payment and the invoice has not been paid by Day 31 you need to chase it.
If polite requests go unheeded, many businesses find a formal letter will do the trick. Don’t forget to point out that you are entitled to charge interest on overdue debts. If large amounts are involved you might have to consider taking legal action or calling in a Debt Collection Service.
Persistent late-payers sometimes cost more in time and effort than their custom is worth. Ask yourself if you really do need to trade with them.
What if other people have cashflow problems?
Economic downturns are bad news for everyone. When a big company fails or needs to make drastic cuts, it can affect dozens of smaller businesses along the supply chain. If a normally good customer tells you he can’t pay because he, too, is owed money try to find a new, mutually acceptable arrangement such as allowing him to pay in instalments. As well as helping to keep both of you in business, your understanding could be rewarded with his loyalty when circumstances improve.
At the same time, contact people you owe money to and let them know you might have a temporary problem with repayments. They are more likely to be lenient if you keep them informed.
What if you need more cash?
Plan ahead as far as possible and explore all your options sooner rather than later. Borrowing might solve an immediate problem but it will also increase your debt. If you know you will need more finance to keep your business going through a difficult period, first try to reduce your outgoings. Take a good, close look at every aspect of your business. Are there more efficient ways of doing certain tasks? Is money being wasted? Cut any expenses that are not strictly necessary. Can you sell off surplus stock or equipment you no longer need?
If you have built up a good relationship with your suppliers, now is the time to ask about discounts or more favourable credit terms. If they are not willing to help there’s nothing to stop you researching other suppliers.
Increasing your cash flow reduces your headaches and those frantic robbing Peter to pay Paul moments. It also gives you a better understanding of your business and allows you to concentrate on growing it as a whole.
If you do decide you need a loan to fund expansion or modernisation, you can show a potential lender an efficient, smooth running business with no hidden nasty surprises. To further impress them, make sure your business plan – including cash flow projections – is accurate and up to date.