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Cash flow management is the discipline of ensuring that more money is coming into to your business than you need to pay out each month. Cash flow will be tight in the early months and years of your startup’s life, so you must monitor it closely at all times.
Here are a few tips about how you can optimise your cash flow.
1. It begins with budgeting
Too many small business owners wing their finances when they should be spending time upfront on budgeting and forecasting. Drawing up a budget and forecasting your cash flow for the month or year isn’t voodoo or fortune telling — it is making an educated estimate about your future cash position using real financial data.
2. Measure and monitor
Once you have a budget in place, you need to keep track of how well it reflects the reality of your business. At least once every month — and perhaps more often for a new or troubled business – you should take stock of payments received and made, cash on hand, and pending payables and receivables.
Be sure that you’re on top of money you’ll need to pay out in the near future — especially items such as VAT, income tax for employees, and company tax. If cash outflows are more than you budgeted for, look at why this is the case. The same is true if cash inflows are lower than your budget.
3. Keep customer payments flowing in
Late payments from delinquent debtors are a major reason many South African small businesses run into financial trouble. The result can be that the small business needs to take a loan at a high interest rate to pay creditors or that it is unable to buy goods on credit from its suppliers after defaulting on a payment. In the worst cases, the knock-on effects can put a company out of business.
Here are a few ideas about you can keep the money flowing in:
- Offer a slight discount to customers who pay upfront or cash on delivery.
- Insist on a deposit when you will need to buy materials or pay other suppliers to fulfil a big order for a client.
- Conduct credit checks on all new noncash customers.
- Issue invoices as quickly as you can and follow up as soon as the customer is late with payment.
- If a customer is consistently slow with payment, ask for cash on delivery.
4. Make supplier payment terms work in your favour
To make your cash work hardest for you, pay your bills on time. Don’t settle them early, unless you’re offered an attractive discount in return. Even if your business is flush with cash, rather keep the money in an interest-bearing account until the bill is due.
But, of course, you shouldn’t pay late, either. In addition to the penalties and interest charges you might incur, late payment sours relationships with your creditors and suppliers. It can also be bad for your reputation, which can make it harder for you to do business with reputable suppliers.
5. Plan for a rainy day
Even the best-run businesses have occasional months where they experience an unexpected gap between the money they need to pay their bills and the money that comes into their bank accounts. Unforeseen events such as productivity lost because of strikes and load shedding, expensive machines that break, or a big customer missing a payment date can cause a temporary cash crunch for healthy business.
Here are some ways to handle the situation:
- Even if your business is doing well, set up a line of credit for your business to bridge any future cash shortfalls. For example, an overdraft can keep your business running smoothly if your customer is five days late with the payment for the month.
- Look at your most important invoices and settle them first. SARS should be first on your list because the taxman won’t wait for payment. Your payroll and your critical suppliers should be next.
- Get on the phone to any customers whose accounts are overdue. If they have exceeded 60 or 90 days, you might offer them a discount to settle quickly.
- Be proactive and speak to any creditors you can’t pay on time — they’ll be more understanding if you keep them up to date with your situation.
- If you have old inventory that is losing value (for example, food products with a looming sell-by date or computer equipment), consider selling it at a discount. It might be worth absorbing the loss to make critical payments on time.
Image by final gather via Flickr