Daily money

7 tips to avoid a cash flow crisis

A healthy cash flow is vital to the success of any business. Read our 7 great tips for managing yours.

Keeping track of what money is coming in and going out of your business is essential.

Remember, profit isn’t the same as cash flow. Your business may generate a large profit margin and you may experience strong growth, but if your money is all tied up in stock you may not be able to pay your suppliers, which could damage your business’ reputation.

Here are seven great ways to keep your cash flow in check and avoid cash flow problems:

1. Keep a cash flow forecast

Set targets for the next six to 12 months to keep track of finances and to avoid any shortfalls. The most basic way to set up a cash flow forecast is to keep a simple spreadsheet listing income and costs on a monthly basis. Take note of any seasonal variations – for example, heating bills will probably go up during winter. Factor in fixed and variable costs to your cash flow forecast and be realistic – include every item.

2. Keep on top of payments

Send out invoices promptly and be quick to chase overdue bills. It’s also worth setting out clear payment terms with suppliers from the start of doing business with them – 30 days is standard. Get to know your customer payment dates and don’t ignore irregularities or delays — a poor paying customer might be about to go bust. Knowing when you’re due to be paid for a product or service will help you keep on top of your cash flow.

3. Stay on top of stock management

Efficient stock management is just as important as managing cash flow. Reconcile your stock records at the same time as you reconcile your bank account – be it weekly or monthly. This way you will remain on top of items that you have left in stock and those that require reordering. An efficiently managed stock control system will have a positive impact on your cash flow because you will never be holding too much stock, or have all your money tied up in it.

4. Stay friendly with lenders

Many businesses need a cash boost from a bank or lender every now and again, particularly when they’re starting out, and might need credit or an overdraft to get up and running. Stay on good terms with them and keep them informed of any unforeseen outgoings or changes in forecasts. By developing a good relationship, based on trust, with banks and lenders, they’ll be more likely to treat you favourably should your business need future financial assistance.

5. Access credit

If your business is growing rapidly – say, for example, you’ve just won a new contract from a client and you’re worried about having enough money to meet your overheads – seek access to a line of credit from a bank or financier, such as an overdraft or short-term loan. In many cases, this is a viable option because banks are more willing to lend to a business if they can see a draft service contract or letter of intent. Once the client pays, you can pay your debt. You will only have to pay interest to the bank or financier for the amount of time you actually need the cash.

6. Tighten up on your outgoings

Assess the frequency with which you pay suppliers, tax bills, utilities and so on — is it possible to pay in instalments or make terms more flexible? Use your powers of negotiation to strike deals that are favourable to you and your business. Also, check on all those little things you spend money on that can add up – as the old saying goes, watch the pennies and the pounds will take care of themselves.

7. Anticipate problems before they happen

Identify potential cash flow problems in advance by regularly updating your cash flow forecast, monitoring market conditions, keeping an eye on customers and suppliers who may be in trouble, and taking action as soon as you see a problem. Don’t bury your head in the sand and hope an issue will go away. By keeping on top of your cash flow you’ll be able to deal with problems quickly and efficiently. Also, if worried, talk to an accountant, investor or business mentor.