By Ade Potts, Managing Director, Experian SME
Cash flow is the life blood of any business according to any expert you might turn to. There’s a phrase: “Cash flow is king”, and it’s well-known to business advisers. It’s one of the main reasons that just four in 10 small businesses survive past five years. That is to say, understanding and managing it well is vital if you don’t want to become one of the six out of 10 that fail at or before the five-year mark.
Your cash flow is essentially the money that goes out in bills and business expenses versus what comes in to your business via sales and investments. Careful management of this doesn’t need to be complicated – but it is absolutely key to the success and survival of your business. Without the right amount of money at the right time, you can’t pay what you owe. It doesn’t matter how much profit you’re making, if you have no cash in the short term, then you can’t pay your bills – and you could go out of business.
By managing your cash flow you will always know if you’re running at a surplus or deficit and can take action accordingly. It can be tempting just to focus on what revenue your business is making but if your expenses exceed it then even if your revenue is high, your business will still have problems!
Equally, revenue doesn’t equal cash in your account until it has actually been paid to you. So your accounts may appear healthy because you’ve earned a large amount of revenue, but your cash flow may still be negative because you haven’t been paid yet – so it pays to know the flow.
Five tips for managing your cash flow effectively
1 Set a budget
Creating a budget is an important foundation for any business. By forecasting what you intend to spend and earn, you can determine ahead of time whether you have enough money for certain projects. From the outset you can identify whether your business costs and revenue streams are setting you up for a positive or negative cash flow. If it’s the latter of course, then you are able to act, make changes, and give yourself a better chance to stay positive.
Once you have a really good understanding of how much money you have going out and how much you need to collect in order to maintain a positive cash flow, you can set cash flow targets to help stay on track. These are a great way to continually check on progress, and also work as a tool to focus on activity that brings in revenue.
2 Keep records
Of course, creating a budget and setting goals is all well and good, but if you don’t track your performance then your targets become meaningless. Once you have clear cash flow targets in place, you will need to keep records and review them regularly to identify any potential problems that will need addressing. The key data that you should be tracking is:
- Uncollected cash
- Monies owed
- Regular expenses
- Available cash
- Individual revenue streams – which are making a profit, which are struggling, etc.
- Gross profit
- Net profit
- How are you tracking against the previous year and previous quarter?
- How are you tracking against your competitors?
Where possible, seek your accountant’s support in creating a reporting system for your business to ensure that it is fit for purpose.
3 Regularly review your spending
Cash flow isn’t just about the money you have coming into your business, the money you’re spending plays an equal role. Make sure you conduct regular reviews of your spending to identify areas where you may be able to cut costs. Here are a few areas that you can focus on;
- Energy savings
Are your buildings energy efficient? Are you and your employees energy conscious? Simple things like ensuring everyone powers down their equipment at the end of the day can make a big difference over the course of a year. Every penny adds up.
- Paper usage
Here again, small habit changes can make big savings. Make sure your printing and copying is double sided, where possible, send things digitally and encourage employees to re-use rather than throw away scrap paper. Take good habits and apply them when using all consumables.
Can some business travel be reduced? Perhaps you can make use of video-conferencing services instead. Where travel is necessary, look at cheaper options, such as switching from first class to standard or from that 5 star hotel to a B&B.
- Systems and equipment
Do you have old systems that are no longer efficient? Do you have manual processes in place which could be automated to save costs? While the initial costs of replacing systems may seem counter-intuitive to the idea of ‘cost cutting’, in the long term, the savings will probably be worthwhile.
4 Credit control
A robust credit control process will play an important part in your overall cash flow position. It is with credit control that you can impact the speed at which you receive your monies owed and so swing your cash flow from deficit to surplus. Credit control is basically putting processes in place to ensure you get paid – and paid on time as much as possible! There are five key areas that your credit control process should focus on.
- Choosing the right clients
Before working with any client, it makes sense to do your due diligence. If you can check up front how likely they are to be able to pay you on time, then why on earth wouldn’t you? Running credit checks on potential clients is a great way to weed out potential financial risks before they happen. You can make sure that you only deal with clients who are most likely to pay on time and pay in full.
- Setting clear payment terms
Once you’ve done your checks and have decided to work with a client then set out clear payment terms up front. Set expectations so your client knows exactly how much they need to pay you, when they need to pay and (perhaps most importantly), the consequences of late or non-payment.
Where you’re selling something of high value, consider offering payment plans which allow your client to spread the cost. This makes it easier for them to pay but also ensures you have regular cash coming in rather than sporadic lump sums. Make sure your client agrees to your payment terms and you have all the terms and conditions written down before moving forward.
- Invoicing promptly
After setting expectations with your client, it’s important to follow through. Send your invoices promptly so that you’re not creating any delays when it comes to receiving your payment.
- Make it easy for customers to pay you
The next stage is to make it as easy as possible for people to pay you once they have received your invoice. People don’t like hassle – in fact they’ll often go a long way to avoid it! By making it as convenient as possible for your customers to pay you, you can prevent a good proportion of late and missed payments. These days, online payments are a good way to go. It’s quick and simple for your clients and ensures the funds arrive in your account as quickly as possible.
- Staff training
Putting processes in place to improve your credit control, your budgeting and your customer due diligence can have a significant impact on your cash flow. However, if your staff aren’t trained in these processes then the system will fall down and your cash flow will inevitably suffer.
This point doesn’t just refer to training staff about cash flow directly. Staff training in general will have a huge impact on your business cash flow. Staff who aren’t trained properly won’t be efficient and may even be a compliance or injury risk. According to Spearhead Learning, last year £950m worth of compensation was paid by employers due to claims resulting from inadequate training.
Find out more ways of managing cash flow here: http://www.experian.co.uk/business-express/hub/infographics/manage-cash-flow-business/