Cash flow management isn’t rocket science.
Put simply, it means doing everything possible to ensure that money flows into your business as quickly as possible and exits it as slowly as possible.
It also means keeping an eye on the future and taking steps to mitigate any potential issues that may creep in down the line. Of course, it’s not all that simple, hence the high business failure rate tied to cash flow problems.
If you’re to avoid becoming just another statistic, check out these tips for avoiding surprises:
1. Profitability doesn’t equal cash
Profitable businesses are just as likely to close their doors for cash flow reasons as unprofitable ones. If your costs are high or you’re reinvesting your profits back into your business then your cash flow can quickly become compromised.
2. Forecast, Forecast, Forecast
Get as much foresight as you can into when cash is forecasted to enter and exit the business. Cash flow forecasting is deeply important in this regard. Your cash flow forecast will not only help you understand your future cash situation it can help you spot any surprises and take steps to mitigate them before it’s too late.
3. Revenue isn’t realised until it’s in the bank
Your monthly budget may be balanced and your P&L statement looks great, but if revenue doesn’t change hands (in the form of a customer payment) before your monthly bills must be paid, then you may have a cash flow problem, albeit short-term.
4. Understand seasonality
Business seasonality has a big impact on cash flow. If you run a seasonal business then many of your outgoings (stock purchases, staffing costs) are made before you sell anything. Plan ahead and analyse trends closely so that you can identify highs and lows and manage your stock and hiring accordingly.
5. Plan for the unexpected
Unexpected expenses and emergencies such as illness, a natural disaster, the loss of your star salesperson, and so on can all impact your bottom line. Have a plan to prepare for these eventualities, whether it’s having a financial cushion, a succession plan, business insurance or cross-training key sales personnel.
6. Become a pro at invoicing and collections
Late paying customers are a real problem for small business. Here are just some of the stats:
- Only 50% of companies pay on time (D&B)
- 64% of small businesses report having invoices go unpaid for at least 60 days (NFIB)
- 14% of small businesses cite late payments are their biggest concern (Kauffman Foundation)
Look for ways to overcome this burden by invoicing promptly (as close to the sale as possible), setting up invoice reminders, and practice good invoicing hygiene. Collect and chase payments as soon as it looks like your payment terms may be in jeopardy.
7. Be ready for growth
With growth comes additional costs – inventory, equipment, marketing campaigns, etc. You can prepare, without incurring cash flow issues, by breaking through some of the barriers that impede small business growth, including cash.