31st May 2017
Good cash flow management should be at the heart of every business, particularly start-ups and SMEs. Paying attention to it from the start ensures that you have the funds you need to achieve your financial and commercial goals.
Cash flow refers to the money coming in and going out of your business. In an ideal world, you will have more money coming in than going out, but businesses are not that predictable. So understanding why cash flow is important and managing that cash flow sensibly is vital to the stability and long-term success of your business.
It’s important to get into the habit of making cash flow a priority. You should always be thinking ahead, whether you are taking on a new client, thinking about leasing equipment, working out your payment terms or investing in new people or premises.
Putting processes into place that ensure you get paid is essential. For some businesses, that means running a credit check before you take on a larger client, setting reasonable credit limits, taking a deposit before work begins, or staging payments for the duration of a project. For others it means insisting on credit card or other electronic payments that are taken automatically, rather than dealing in more unreliable methods of payment. You should also be confident that your terms and conditions are accurate, legal and enforceable.
Encourage your clients to pay by offering incentives for early payment, setting up direct debits or standing orders for regular or retained clients, and don’t be afraid to chase payment as soon as your payment term has expired. Have a clear process for collecting outstanding payments so you are not waiting for cash to come into your business.
Most businesses have a cash flow forecast. This allows you to see when and how cash is moving in and out of your business, and allows you to see potential difficulties ahead, so that you can plan with confidence. A cash flow forecast should be part of your regular monthly accounting processes, and you can get professional advice on how to release cash into your business by reducing stock levels for example.
In fact, it is just as important to keep track of the cash going out of your business as the cash coming in. Negotiate with your suppliers so that you can get good payment terms where you can, and take the time to build strong relationships with them so that you know you have the flexibility to delay payments slightly if your cash flow is tight. Look for ways you can manage and plan your cash – by leasing equipment rather than buying, or outsourcing key tasks rather than hiring permanent staff members.
For advice on cash flow management and help with keeping your monthly accounts, please contact us on 01252 711244