Careful management of cash flow is paramount to any business. But for start-ups, the threat of erratic cash flow can bring a company to its knees before it has got going.
Cash flow is a key indictor of your company’s financial health, and even if you don’t consider yourself to have a head for numbers it is important to keep a keen eye on what’s coming in and going out.
Here are some tips on how to facilitate positive cash flow in your business:
1.Create a budget
Thoroughly estimate expected cash inflows and outflows, taking into consideration, timescales, sales cycle, discounts, and any other factors that may affect the timing of incoming cash. It is also important to identify any other outgoings, such as stock, wages, equipment, raw materials and taxes. This can be a particularly daunting and complicated process for new businesses, but there are templates available on the Internet for free that can help you keep a handle on things. If you can afford it, there are now excellent book-keeping software packages on the market to simplify the process.
2.Know what you owe
Make sure you are always on top of what you owe and your invoice deadlines. Come up with a minimum amount of cash you need in the bank to be able to meet these demands (and still have some left over) and get into the mindset that the cash can never drop below this amount. This way you will always be left with something should money owing to you not come in on time.
It’s not very often your invoices are going to be paid early, in fact most invoices end up being paid late. To prevent this having a negative effect on your cash flow, send out your invoices early. This way you’ve got more chance of collecting the money when you need it. Even better, bill upfront if you can. This will ensure you are in a strong position financially.
4.Be firm when chasing invoices
Create a template for chasing up overdue invoices. Keep it polite so as not to create any bad feeling between you and your contractors or customers, but make sure the message gets across clearly. Having a regimented process in place will show continuous late payers that you won’t stand for persistently lateness, therefore encouraging them to pay up what’s owed sooner rather than later.
5.Make your payment systems foolproof
Sometimes a late payment could simply be down to complicated payment methods, so they just keep putting it off and eventually it becomes overdue. Remember that everyone’s busy, and having a simple payment system could be the key to getting paid on time. Maybe offer electronic payments, payments through PayPal or by credit card, for ease on both sides.
6.Don’t forget about your tax bill
Make sure you’re not knocked off track by a huge unexpected tax bill. Ask for help from your accountant in estimating your tax, or use accounting software to calculate VAT. Always put slightly more cash aside than you need to make sure you cover your back, should any miscalculations occur.
7.Pay your bills on time
You don’t want to find yourself caught in in the middle of a payment war by paying bills late just because you weren’t paid on time yourself. If contractors find themselves strapped for cash, you’re more likely to be one of the ones that gets paid if you have maintained a consistently good payment history with them. Aim to build positive financial relationships wherever you can.
8.Don’t buy too much stock
Unless you’re getting a particularly good deal of the purchase of stock or other materials, don’t get into the habit of over stocking. There’s no point tying up cash that could go to better use, or provide as a safety net if you encounter any bumps in the road. Excesses stock might also end up going to waste, should its market value decrease while it remains unsold.
9.Have a back up plan
Effective management of cash flow doesn’t always go to plan, so it’s important to have a contingency plan. Work with your business advisor to establish other quick possible sources of income, should the need arise for a speedy cash injection.
If you have a business idea or have just started a business and are confused by the financials, call 0191 516 6102 or email email@example.com to find out how we can help.