Managing cash flow in your business

man using calculator and writing on a notepad. Cash flow is king is what the picture is demonstrating

Cash Flow is King

When I set up my own business my Dad said to me “Remember, cash flow is King”. At first I didn’t see this as a major show stopper as I had one client that produced regular invoices and opportunities.

My outgoings at the time were reasonable as I didn’t have children and lived in a small house. Fast forward 2 years I ended up having to borrow lots of money from my Dad as the invoices didn’t come in time ready to pay the tax bill. It was a difficult and stressful position to be in and I now have strategies in place so this will not happen again.

What you find is as your business grows, so does your lifestyle and the risk of cash flow challenges. You obtain new customers who may spend a considerable amount of money with you. However they do not always pay on time, they don’t always buy what they say they are going to when they are say they will.

 

Trends and market forces lead to a different playing field so businesses are constantly evolving the way they operate to ensure continuous fruitful success. My rule is to always remember absolutely nothing is a given with cash until the money is in your account.

I found it interesting to read that according to the office of national statistics cash flow is responsible for up to a whopping 90% of business failures. BACS research shows that almost half of the UKs small to medium sized enterprises are being paid late, with the average payment debts estimated to be £32,185.

 

money dripping from a tap in to jars with plants. cash flow is running from one jar to the next

Strategies to improve cash flow

The sensible approach is to understand and manage your cash flow to protect yourself and business. I hope you find strategies below helpful to manage your cash flow effectively.

Build that Money cushion

You can think business is booming and I am rolling in it. It can, however, quickly turn into a feast or famine situation. Unexpected personal or business expenses can leave you short; expect the unexpected and over estimating costs can help you stay financially realistic and on track.

It is absolutely key that you build a reserve to act as a comfortable money cushion to reduce the stress and pressure attached to the life of making your own money.

Have a positive cash flow Mindset

Always remember a cash flow challenge is a gap in your finances and part of running a successful business not a FAILURE. When facing a cash flow challenge, I ask myself 3 questions to help me rationalise these financial gaps:

1. Do I have enough cash on hand to cover the next 90 days?

2. Am I doing everything I can to build my business pipeline?

3. Am I making sure my customers pay on time?

If the answer to the above questions is yes, remind yourself that you are doing the right things to grow the business and encourage a healthy cash flow. If you start to worry, repeat these questions to settle your mind.

Understand money in your business

However big your business is I strongly recommend you have a good accountant. A good accountant will save you money when it comes to paying your tax bill as they are the expert in this field.

Good accountants are commercially aware and they can educate you so you totally understand the important things. They know the law, so the advice they provide can be incredibly valuable to your business growth and profit line. Knowing your important numbers can allow you to know at a quick glance how your business is doing.

An online financial management system can save you time and stress, and can be easily shared with your accountant and employees if required. There are lots of different financial management systems out there. I strongly suggest a free trial to find the system that works best for you.

Keep a clear up to date record of cash flow actuals and forecasts. Remember to include expenses and estimated expenses so your business can continue to operate in the way it needs to.

Be Savvy to drive money in to the business

Where possible, offer customers retainers to steady your income. Review your pricing and the services you offer to stay competitive. Offer early payment discounts, encourage upfront payments, shorter terms such as 10 days or instalments.

It’s important to note that some customers will purchase based on payment terms rather than price, as they might need to support their cash flow too. Make sure your invoices are prompt, clear and easy to understand to avoid payment delays.

Take the approach of little and often and invoice more than once a month to take the pressure off the bills to pay. Remember every Customer wants to know exactly what they owe you and by when. Research your customers using credit references agencies to give you piece of mind when working with someone new.

Pay yourself a wage that’s right for you and the business and explore all investment opportunities during cash rich times. These strategies have enabled me to stay in control of my finances.

Evaluate money out

Consciously review and look for the best deal on things like insurance and utility bills. Compare prices and look for recommendations from other business owners. Look for suppliers who offer early payment deals or who offer extending payment dates to support your cash flow forecasts.

Select the right bank and look out for mobile bill payments, direct deposited services and utilise a business credit card so you and your employees can pay for things as and when needed. When developing your budgets and reviewing expenses, categorise them into two buckets – expenses that enable business growth and running costs.

Think about how you could be more savvy and reduce costs where you can. Review budgeting activity to monitor how accurate your thinking is, and make sure you consistently evaluate money out.

These strategies have enabled me to feel under less pressure. Yes, I definitely learnt the hard way….cash flow is king!

If you would like to read more about having a healthy mindset as an entrepreneur, check out this article from our guest writer Jazmine Wolf.

Claire

High & wise

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