Simply defined, cash flow is the money coming into and going out of your business, tracked on a cash-flow statement. If you have positive cash flow, you have more money coming into your business – typically through sales – than going out – to expenses such as payroll, stock, and rent.
For a number of reasons, many business owners struggle to maintain a healthy cash flow within their businesses. Here are 5 questions that will help you better manage the cash flow in your business:
- Where’s the money? It’s important to understand the flow of money in your business and how long it takes that money to move through your business. Work out what happens to your cash every month. And ask yourself how long to it takes for money to come into your business and be used before you get paid again. How to do this? Work with a reputable accountant to keep your business’s balance sheet and profit and loss statements up to date and review them regularly. This will allow you to see exactly where you spend your money and where you can correct any problems – for example, by invoicing earlier, you could draw money into your business when you need it most, rather than waiting for money to come in.
- Are your customers paying you on time? This is a bigger problem for businesses that offer services rather than goods that are purchased on-site but it can happen in any business depending on your payment terms and conditions. Just because you invoice a client, it doesn’t mean they will pay you on time. Research shows that most debtors pay later than expected and tend to pay the supplier that is the most insistent first. So, if you want to get paid, you need to be alert and proactive. Always invoice timeously, put in place a system to remind customers to pay on time, and follow up on unpaid invoices. You could also get key customers to pay a portion of their invoice upfront so that some money is guaranteed before you hand over the goods or perform the required services.
- Have you planned ahead? Work with your accountant to develop cash flow projections. These should be laid out on spreadsheets, include as much detail as possible, and be updated on a regular basis. Get to know how much cash you will need in your business in the months ahead and take into account factors like seasonality or holiday months where you might make more or less money depending on your business.
- Do you really need that much? Your inventory is the cash in your business turned into product. However, if you don’t sell the product, you won’t see the cash in your business. Work out your sales cycle and find out how much stock you really need to buy every month. Avoid surpluses and turn over your inventory as quickly as possible. The bigger your inventory, the more money is tied up in it and not available for other expenses. To free up some much-needed cash, buy smaller amounts and rather refresh your inventory more often.
- What’s the back-up plan? Life and business can be unpredictable – a big customer might not pay their invoice, the rent could go up, or it might be tax time… Whatever the reasons, every business should have a cash flow back-up plan to manage shortfalls. Start to save cash reserves as soon as possible, and make sure that, should the unexpected happen, you will be able to do things like pay bills while waiting for payments to come in.
Cash flow is the life blood of your business – you need it so you can buy goods, pay employees and suppliers, and engage in new opportunities. No matter how profitable your business, if all your funds are tied up in stock or your customers haven’t paid their invoices, your business might be forced to shut down. You and your team should treat your cash flow as one of the most important parts of your business, essential to keeping the doors open.