Cash flow is the lifeblood of every business and monitoring it regularly is crucial to business survival. Cash flow is equally as, if not more, important than generating sales as when a profitable business loses as a customer, it can move on and learn from its mistakes. However, when a profitable business doesn’t have enough cash to pay its debts, it can quickly erode into insolvency and go out of business.
If the company’s cash flow regularly dips into the red, here are some tips to help FDs boost the lifeblood of the business.
Cash Flow Forecast
The most important thing that FDs can do is to forecast cash flow regularly. Forecasting is taking all the information available and creating the vision for how the company will operate in the upcoming 12 months. It should show all revenue sources and compare these against expected business expenses. The cash flow forecast should be updated regularly to provide an accurate picture of the company’s finances over the next 6-12 months. It identifies the natural ups and downs of business income to enable FDs to make sure that a bank overdraft or a short-term loan has been arranged for when cash flow is tight.
FDs should have three contingency plans in place to meet the cash flow requirements of the business. These are the best case, most likely case and worst case scenarios: when everything is going to plan, when business is slightly lagging and when business is not good. It’s important to speak to a lender to organise a short-term finance or an overdraft to ease cash flow pressures when push comes to shove.
Set Clear Payment Terms
The chances of prompt payment are vastly improved by invoicing customers quickly, communicating clearly and sending customers regular reminders. It’s also critical that FDs establish clear payment terms from the outset. As it’s extremely difficult to know when a payment is overdue if the payment terms are unclear. If the payment terms have been set out clearly and the customer ignores them, then FDs can consider charging interest or ‘overdue fees’. Businesses that take this option can reverse the charge once the customer has learnt its lesson.
There is a fine line between a credit policy that is so restrictive that it’s off-putting to customers and a generous one that could impact cash flow negatively. It’s crucial that FDs put in place a well-considered credit policy by creating credit profiles that help set appropriate terms. When a business starts a relationship with a new customer, background checks are vital as are credit reports and checking out the customer’s payment history. New clients should be asked for credit references. They can also be put on regular monitoring with a credit reporting agency so FDs are alerted of any changes.
Customers should be invoiced as soon as the work has been completed, not every two weeks because other commitments and responsibilities have interfered with this process. The sooner cash is collected, the faster it can be used to meet the company’s liabilities, such as payroll or debt. FDs should consider issuing invoices by email as it gets the invoice to customers immediately and there is a record of it being sent.
The leading cause of small business failure is cash flow problems. If you would like help identifying the cause of cash flow pressure and to discuss potential solutions, please call 08000 746 757 or email firstname.lastname@example.org for free and confidential advice from one of our professional advisers.