Cash is like water. It flows and it can disappear as fast as it appears.
Cash flow is the money currently flowing through your business, as opposed to future money from your debtors. It’s your “in hand” money. Is your business able to meet its expenses with what is currently in your bank account? If the answer is yes, you have a positive cash flow. If not, you are experiencing negative cash flow.
Cash flow management comes down to timing and planning. A forecast of your cash flow as far into the future as possible is vital for your business, to allow you to plan accordingly. What does your cash inflow (e.g., accounts receivable, revenue, etc.) compared to your outflow (e.g., expenses, accounts payable, etc.) look like. How far can you forecast this, two, three or even six months from now?
Three Tips For Managing Cash Flow
1. Plan In Advance
Budget, budget, budget! Forecast your monthly expenses and revenue as accurately as possible. This means examining your invoices at least monthly and sending them out on time to ensure there is always cash on hand to cover your monthly expenses.
Sometimes this may require conversations with your clients to arrange an earlier payment date for some and a later date for others. Depending on the type of work, clients could be invoiced on an “upon completion” basis instead of monthly or interim invoices could be agreed to if the work spreads out over a long period. The same can be said for expenses: Negotiating payment plans, custom payment dates or flexible terms with suppliers can make all the difference between a positive and negative cash flow month.
2. Arrange For The Ability To Borrow Money Before It’s Urgent
As a business owner, it’s important to be aware that at some point you may need to have short term loan or overdraft facilities to support your business. It’s vital to have a good understanding of your cash flow, inflows and outflows, so that you can predict when you may need to borrow money and arrange for it before it’s urgent or too late.
It’s generally advised to contact your bank first to try and arrange for a credit facility, as this is more than likely going to be the cheapest form of debt to bridge your cash flow requirements. However, as many businesses have experienced recently, larger banks are tightening up their credit facilities and they may move too slowly for small-to-medium-sized businesses. Fortunately, the increase in alternative lenders has created an avenue for smaller loans that can be accessed faster, meaning banks are no longer your only option.
3. Monitor Your Money
In any company, it’s imperative to track and forecast every expense—it’s not just the big ones that are important. Monitoring the inflow and outflow of cash is how you’re going to get on top of cash flow management.
Realistically, some months will be better than others, and sometimes a crisis may hit. When you’re under pressure for whatever reason, it can be easy to lose sight of exactly where the cash is going. Set yourself up for success by monitoring your money effectively, and start when things are going well, so you’re not caught off guard when things aren’t.
To make monitoring simple and more efficient, employ technology where possible. There is a never-ending list of accounting software suited to businesses at any stage of their journey. However, there is nothing wrong with a simple, well-designed Excel sheet.
Final Thoughts
Most businesses fail due to poor cash flow management. Make sure you aren’t one of them by getting a grip on your inflows and outflows. Remember to plan in advance, arrange for the ability to borrow money before it’s urgent and monitor your money, and you’ll be one big step closer to business success.
Call us if you need help with managing your cash flow.