Staying on top of your cashflow

As any small business owner of adviser will tell you, cash is king.  The principals of good cashflow management are straight forward.  This first guide in our series gives you 10 top tips to stay on top of your cashflow.

1.  Credit control

Setting up a good credit control system needn’t be complicated – it’s really all about getting paid as soon as possible – but it’s essential to put some procedures in place. The basics include setting clear credit limits and payment terms for your customers, sending out invoices promptly and firmly chasing all debts when due.

2.  Sales forecasting

Put simply, sales forecasting is all about predicting what’s ahead so you can prepare for cash flow peaks and troughs. As soon as you have a month’s sales behind you, you can start forecasting cash flow – using your market knowledge, think about your pricing, the level of competition, the state of the economy and so on, to work out demand. Remember it’s better to be overly cautious than optimistic – that way, you’ll hopefully avoid nasty surprises.

3.  Cutting unnecessary costs and spend

When it comes to preserving cash flow, think lean and mean. Scrutinise every item you buy, know exactly where your cash is going and always get value for money. Work out what you really need too – those office pot plants might look nice but they won’t grow your business.

4.  Negotiating good terms with suppliers

It’s always worth investigating to see if you can extend payment terms with suppliers. After all, if you can settle your bill in 60 days or even 90 days rather than 30, you get to hold on to your money for longer and this helps regulate cash flow in a business.

5.  Managing stock

Monitoring stock closely and only ordering what you need is essential to avoid outlaying unnecessary cash. Work out what sells quickly and profitably in order to keep income steady and make sure you’re not tying up funds in slow moving items that are difficult to shift. If you’re looking for a quick cash injection, try selling off old or outdated stock at a cheaper price.

6.  Don’t tie up cash

If you’ve got orders coming in, it’s always tempting to buy the latest equipment or splash out on impressive new kit. But think wisely before splurging on excessive purchases and try to hold on to liquid cash. If you’re buying assets like computers, ask if the supplier will offer a finance deal over a year or consider taking out an overdraft.

7.  Keep on good terms with lenders

Times might be tight and it’s harder to get a loan than it used to be but it still pays to keep on the right side of the bank. Always keep your books up to date so you can show your figures, just in case you need to borrow – and don’t forget, if you’re struggling with repayments, talk to your lender rather than burying your head in the sand about the debt.

8.  Invoice discounting

It won’t suit every business model but one way to regulate cash flow is to use invoice discounting, where a third party ‘buys’ your invoice and releases cash based on its value. If you’re growing, it can be a good option and some lenders will give you up to 90 per cent of the invoice amount. Fees can be high however so always shop around – it’s a very competitive market.

9.  Spotting the warning signs

A drop in turnover, customers taking longer to pay, incurring late penalties from HMRC and being forced to settle supplier invoices later than usual – these are all classic signs that your cash flow is suffering.

Don’t ignore the warnings – it’s generally easier to work out ways to increase working capital before you’ve built up a lot of debt.

10.  Be realistic about your business

Sometimes you need to take a step back to see things clearly and running a business is no different.

If you’re always struggling and your cash flow statement is poor, ask yourself why. Are your sales too low? Are your products poorly priced? Can you chase payment more quickly? Be level-headed about your venture and its future – if you’re not making a profit, you might need to rethink things.