Are you in a new start-up business? Are you going to supply your customers on credit? It’s key to understand that one of the primary reasons a lot of new businesses fold soon after launching is lack of cash flow. Cash is key and is the lifeline of a business; without cash running through the business, there simply is no business. Attempting to run a business without a healthy flow of cash, the business will be facing a constant struggle. Where, when and how you spend your cash is essential. It’s important to be smart with your money and resist spending all of your initial start-up capital, leaving your business strapped for cash.
So, realistically what can you do to keep cash flowing through the business? What are the most important things to do when the business is working well, but cash flow is tight?
Create a Realistic Cash flow Forecast You Are Likely To Stick Too
A cash flow forecast is one of the most important things to plan before you start the business. You need to prepare a month by month basis, of your total in comings and outgoings, including quarterly and yearly payments which need to be made.
A forecast will allow you to keep track of your total cash at any one time, and see how much is going out on salaries, supply costs and utilities. It’s important to be aware of the difference between cash flow and profit. All commercial businesses exist to make a profit, but profitable businesses can run out of cash, especially if they supply on credit and have to wait for payment. For this reason, it is always essential that you plan to ensure you have enough cash to keep afloat until profits turn into cash.
Planning Your Benchmarks
Just as it is important to manage your cash it is also important to make sure your business is profitable. If your business is cash positive and there is plenty of cash in the till it doesn’t necessarily mean the business is making profit. When starting a business, it is good to be aware of your breakeven point. This is a term used to describe the balancing point where revenue exactly equals the total costs. If income falls below this point the business is making a loss. If income exceeds this point the business is making a profit. Making sure you know your breakeven point is critical. Your breakeven point can change if, say, your overheads increase or decrease.
Try To Maintain a Cash Reserve
By creating a cash flow forecast, you should be able to predict potential cash shortfalls. They happen to every business and especially start-ups. The key is being prepared for them by building up cash reserves. If you haven’t had chance to accumulate a cash surplus, it gives you the chance to look at alternative ways of managing the situation – perhaps by trying to borrow the money. But you may be faced with an unexpected large cost, that comes from replacing broken machinery or a costly asset. Having cash reserves will also help you quarterly rent and VAT payments or annual tax liabilities.
For businesses which rely on seasonal custom, cash reserves become even more important. Making sure you have enough to get through those leaner times is critical to survival throughout the year.
Manage Your In comings and Outgoings
This is perhaps the most important aspect to maintaining a good level of cash flow. Even if you are smashing your sales targets, if the cash doesn’t come in before your outgoings are released then you will be in serious trouble. In fact, if the business is growing at a rapid rate, that can exacerbate the situation.
Try to issue invoices before you’ve completed the work, or make it the business norm to ask for deposits upon agreement of work. Alternatively, you could offer incentives, such as possible discounts to clients who pay on time, or pay early. It is always wise to check your customers credit history; it will give you a good indication of just how reliable your clients will be and help you to avoid bad debts. The sooner you can bring in money the easier it is to handle the payments of your outgoings.
In addition to trying to negotiate payment terms as short as possible and follow up on invoices wherever possible, you may be able to extend the credit you take from your suppliers. Work with suppliers to extend your own payment terms and take advantage of the best deals available. If your business cannot pay its accounts on time, talk to your suppliers and try to work on a beneficial deal for you both. As a customer to suppliers, they will want the business to succeed and will be more inclined to help you than if you avoid them.
Control Your Growth
Growing faster than you expected might seem like the best thing that can happen. However, with that extra growth comes a huge amount of additional expenditure. More staff, more stock and more cash tied up in unpaid invoices all need to be funded, on top of your current overheads. With too much growth everything becomes that little bit harder to control and maintain.
Even large, established companies are vulnerable in periods of exceptional growth. It stretches cash flow and also tests systems and management skills.
What To Do If You Are In Trouble
Sometimes in business there is simply nothing you can do prevent problems occurring. The business might be working well on many levels, but you could just be unlucky with expenditures that you didn’t see coming. So, what can you do if you’re already having cash flow problems?
Bank loans are an obvious solution when you’re struggling to get cash flowing throughout the business. Naturally, if the business is having troubles banks will normally deem you more of a risk. However, if you can prove that the business is profitable and has a viable future and that you are in a predicament through no fault of your own, then you may be able to secure business loans from banks.
An alternative to loans for B2B businesses, is invoice financing. It doesn’t matter what sector you are in, clients pay late a lot of the time. For new start-ups, this can cause massive strain on the business and slow down the whole process of operations. Naturally it will give you cashflow issues as you attempt to keep up with your outgoing payments. Invoice financing effectively gives a business the option to borrow money based on the value of unpaid invoices. A factoring company will come in and lend you a percentage of your invoices. They will then go out and collect the invoices, take out their fees and then give you any residual balance. This option allows the business to ease cashflow problems and the facility will grow with your business.