Why cash flow is the lifeblood of your business

In February I was invited to Sage’s ‘future of your business’ event in London. With insight from guest speakers Emma Jones, founder of Enterprise Nation, and Emmanuel Marchal, founder of BigDataLondon, the event provided a great opportunity to meet the capital’s newest entrepreneurs.

There was a huge variety of business ideas and concepts, and all were backed with great enthusiasm. However it quickly became apparent that there was a trend emerging: people were concerned about cash.

Cash is king

I was surprised to discover that the main issues weren’t necessarily related to funding, but rather the ability to manage cash on a day-to-day basis. Issues like customers not paying, unexpected costs and having to pay the VAT bill seemed all too common. It was also apparent that the pursuit of profit was deemed more important than cash flow management. Yet profit means nothing if you don’t have the cash to pay creditors.

This got me thinking back to a presentation a few years ago. David Bloom of fdu group explained the importance of cash flow forecasting and offered examples of situations often overlooked by small businesses.

In particular, he highlighted the fact that payment terms, seasonality and inaccurate expectations of new employees could dramatically affect cash availability. Suddenly it was obvious that failing to anticipate the worst-case scenario could cripple even a highly profitable business, and could certainly destroy a start-up early on.

Some tips for managing cash

With this in mind, I have put together a list of 5 simple tips to help you manage your cashflow and avoid unexpected shortfalls.

1. Create and maintain a cashflow forecast: Cashflow forecasts are often overlooked by small businesses. A cashflow forecast will allow you to anticipate shortfalls, giving you plenty of time to prepare. If you forecast a shortfall in 3 months, you have time to arrange an overdraft, renegotiate a payment or sell assets. If set up correctly you should be able to plug in the numbers for different scenarios, giving you additional knowledge to assist in making business decisions.
2. Chase debtors: You don’t have to have been in business for a long time to know that people don’t always pay on time. It is important to keep control, identify those who are more reluctant to pay quickly and do what you can to speed up the process. It may be worth enforcing sales on a Pro Forma basis. A carrot and stick approach may also be suitable. For example, offering discounts for early payment, or charging interest for late payments.
3. Hold off paying invoices as long as appropriately possible: Whilst you probably do not wish to annoy your suppliers, keeping hold of your money as long as possible can help you ensure you have sufficient cash. Negotiating longer payment terms is always favourable, but sometimes paying interest on late payments may be the best option if you’re facing a shortfall, and could even be cheaper than the cost of arranging an overdraft. However, It is worth ensuring that you don’t jeopardise losing the supplier or damaging your credit rating.
4. Don’t overspend:This is an obvious tip when you think about it, but don’t spend morethan you can handle. Do you really need that much stock? Can you survive a couple more months before you replace your computer? Individuals often impulse buy, but businesses can do this too, especially small businesses where there are only one or two people making decisions. Creating a process to vet purchases can often reduce expenditure and therefore outward cash.
5. Anticipate problems: Reiterating and building upon my first point, if you’re making the effort to produce a cashflow forecast, make sure you use it. If you’re not looking for shortfalls then you probably won’t notice them until they happen. You can adapt given plenty of notice, but you can fail quickly if you don’t know what’s coming.