For a business, cash flow is like oxygen. Your business depends on healthy cash flow for survival, and if you handle it well, it can even give you better buying and negotiating power. A healthy cash flow is a pretty simple concept: you have to have more money coming in than going out, and it must arrive in time for you to pay suppliers and purchase new stock.
It’s easy enough to understand, but it may not always feel simple to execute. So how exactly do you make sure this crucial piece of the business is in good shape? Here are 7 tips to stick to.
- Keep a cash flow forecast. First, set targets for the next six to 12 months to track your finances and avoid shortfalls. Then, note seasonal variations like heating bills increasing during the winter. Don’t forget to factor in fixed and variable costs and be realistic about your forecasts.
- Stay on top of payments. Send out invoices to customers and clients promptly, and chase overdue bills. Be clear about your payment terms; 30 days is standard. Get to know your customer payment dates and don’t ignore delays because a customer who hasn’t paid up recently might be about to go out of business.
- Control your stock. If you know what’s in stock and what you need to reorder, you’ll avoid tying up your cash in too much stock. To achieve this, reconcile your stock records at the same time as your bank account—be it weekly or monthly.
- Stay friendly with lenders. Whether your business is new or expanding, you may need the occasional cash boost from a bank or lender in the form of an overdraft, credit agreement or revised payments terms. If you keep your bank and lenders updated about unforeseen outgoings or changes in forecasts, they’ll trust you more. They’ll also be more likely to treat you favorably should your business require financial assistance.
- Access credit. If your business is growing rapidly, seek access to a line of credit from a bank or financier, such as an overdraft or short-term loan. In many cases, banks are 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.
- Tighten up your outgoings. Assess how often you pay suppliers, tax bills, utilities and so on. Then, consider if you can pay in installments or if you should seek more flexible payment terms. Also, review the smaller expenses and see which ones add up.
- Anticipate problems before they happen. Identify potential cash flow problems in advance by updating your cash flow forecasts and monitoring market conditions. You should also consider if your customers or suppliers are in financial trouble and take action if needed. If you’re worried, talk to your accountant, investor or business mentor before a small problem becomes an urgent one.
Remember, cash flow is critical to the success of your business. Don’t neglect it!