Speak to any banker, accountant, market analyst or business adviser about why businesses fail and most often cited as the prime cause is poor cash flow management. On the face of it making sure there’s always sufficient money available to keep things afloat seems a simple enough concept, so why is it such a common problem and what can be done to make sure your business doesn’t join the list of failed enterprises?
The answer to the first question is probably that it’s due to a number of things such as concentrating on profitability and the day-to-day operations of the business or being lulled into a false sense of security by the size of the bank balance at any one time without considering how many commitments it needs to fund and for how long. In short it’s only human nature to be more interested in what motivated us to start our business than managing cash flow. But manage it we must because the sad fact is that many very profitable businesses have gone bust because the owner didn’t pay attention to it. The good news is that, with a bit of forecasting and an organised approach, cash flow fatalities can be avoided. Here are ten tips to help you keep on top of the money:
Prepare and maintain a forecast for the coming year predicting the amount and source of your sales and, importantly, when the money will likely be in your account. Although it might seem impossible to foresee how customers will behave, an analysis of last year’s receipts will help make a forecast which can be reviewed and revised on a monthly basis.
Invoice your customers promptly and follow up as soon as the terms of your payment period are exceeded. Recent research found that 59% of SME’s suffer late payment problems – with 33% saying that the failure of clients to pay on time actually risks the survival of their businesses.
- Account for annual and quarterly advance payments in your monthly expenditure forecast.
- Plan purchases so that you buy only when you need to and avoid bulk buys that tie up cash for long periods.
- Consider leasing as well as outright purchase if you need new equipment. Vehicles, computers and machinery can all be sourced in this way and spreading the cost may be worthwhile. A proportion of the VAT on leased cars can also be reclaimed
- Regularly check your bank balance.
- Put money aside in high rate savings accounts to cover tax bills that don’t need to be paid until later in the year.
- If you have a small, VAT registered business, consider the Cash Accounting or Flat Rate scheme for paying your bill.
- Investigate diversifying to smooth your income stream if you have a seasonal business
- If you have a number of long standing debts and are experiencing a cashflow problem, consider selling your invoices to a factoring company but be aware that you will not get the full value of the invoice.
The ‘bottom line’ is when it comes to cash flow, prevention is always better than cure!First published in 2008