Things you need to know about cash flow management
June 23, 2014
This week @ EntreHub we are focussed on managing the money side of your business and in doing so providing some quick and basic tips on the things you need to know and think about. Today we kick off the series talking about cash-flow management. Also, check out our pinterest page where we will have quick reference cards loaded up for you to download and use!
Always make sure that when you get into a small business that cash-flow is central to what you do. Have a budget know when your bills are due and have strict terms on your invoices where you can – remember, not everyone will you on time so be prepared.
We have all heard the stories of great business ideas coming off the rails because the ability to manage and understand cash flow is just not understood. It is also true that very few people who start-up a business has a high degree of financial literacy and because we often try and run things at low cost we try and do the accounting side ourselves as well. The fact is that if you are going to survive in business you need to understand that sitting at the heart of your success or failure is your ability to manage cash flow.
So what is cash flow? Essentially it is the ability to ensure that you have enough money coming in to your business that is able to cover payments out as and when they fall due. To be a little clearer it is your ability to ensure that you never leave yourself short while at the same time making sure you don’t get yourself into debt. The art of managing cash flow comes when you realise you only need to pay bills when you need to, and not necessarily when they always fall due.
So here are our tips on how you can manage cash-flow from this week’s series focussed on the money management side of your business:
Prepare a cash-flow forecast:
The first thing you should already have in place is an annual budget. The budget will outline what you think you may need to spend over the course of a 12 month period on certain line items such as labour costs, rental costs, IT and insurances. Hopefully those figures will come from actual payments you would need to make over the course of the year and not just a figure that you think you will need to cover. If it is the latter then return to the drawing board and design a budget that encompasses as close to the mark as possible, real costs.
If you already have one then strip that budget down to a monthly one encompassing those expenses that will have to be paid within six weeks of that calendar month. What this does is it gives you an idea of what will fall due and when. Now, have a look at how much cash you have at hand to ensure that for at least the first two quarters you can cover the basic operational costs of the business. Why? Because if you do have delays in the payment of invoices then at least you won’t need to be in a position to delay payments to the point that it will impact on your credit score.
Make sure that all your expected expenses have been included from interest on loans to commissions to sales agents – remembering that effective cash flow management is all about the accuracy of how much you will have on hand versus your expenses at the time interval that makes sense for your business (such as if you pay expenses on a weekly, fortnightly, monthly etc period).
Improving your revenue collection
It is a fact of business that even though you may think a customer will pay you on time they often don’t. Also, and this can be a trap, just because someone has bought something instantly using a credit card online it doesn’t mean to say you will bank the money immediately or that if you use sites such as EventBrite for running education workshops and conferences that you will get the money as and when someone registers. In the last two examples it will be the case that you will not bank the money when it comes in.
Banks and credit card payment gateways will hold on to the money before dispersing it and often (whether online or offline) you may need merchant services to both accept and disperse credit card payments. In the case of sites such as EventBrite it will often be the case that funds are not receipted into your account until the event has been held and even then it can be between five and ten working days before you get paid.
In all of those examples this could impact your cash flow management because suppliers still need to be paid even though you may not have received the funds. So, here are some basic tips that we recommend that could improve your revenue collection and management:
Be sure to have clear and strict invoicing terms and conditions on all of your invoices and client agreements. Try and keep to 7.14 or 21 day payment terms where possible
Check to see if you have to be a registered supplier to the client and fill in the necessary forms as soon as possible. This is a trap for small players you do business with a large company -they often require you to be registered and they also have specific invoicing terms you may need to comply with. By being clear on this front you will be able to adjust your forecasts accordingly.
Always issue invoices immediately: getting invoices out immediately is important but so too is getting them out to the right person. Make sure the person who approves the invoices gets it and always follow up with accounts for payment. By doing so you will be able to get an accurate picture of whether the approving person has in fact submitted it internally for payment.
If you are running a consulting business: at a minimum try and get the client to pay at least 50% of the invoice up-front, 25% of the work during the project and 25% on delivery of the final report or final piece. This will enable you to ensure you have enough cash flow coming in to manage the costs of the engagement as it unfolds. At a minimum you should be able to use the upfront 50% to cover the majority of the costs of a piece of a work upfront.
If you are running a high stock business then make sure your client has been credit checked and be strict on payment terms. You don’t want to fall into the trap where you have paid money out on the good or service, provided it to a client and in the end haven’t been paid. Make sure you know who you are dealing with.
Try and avoid using discount offers because they don’t always work in our experience particularly when you are dealing with large clients and organisations. They care more that you are a registered supplier and that they have received the goods as opposed to receiving a discount on an invoice – that said, if you do go down this path then budget for whatever percentage of the invoice you are prepared to give away. Remember, that money comes out of your pocket and your margin so be careful that when you add everything up you haven’t in fact lost money over the exercise.
Manage your outgoings and expenses:
The great thing about cash flow is that it gives you some accurate readings on what is happening with the business and also provides some great red flags that you can be prepared for. A red flag is a pre-warning that something bad may be up! Also, let’s face it -sales guys are always a little creative when it comes to their pipeline of sales right? So, the following are our tips on what you can do to better manage your outgoings:
Always take advantage of creditor payment terms and never pay bills before they fall due. If someone has payment terms of 30 days then don’t pay it in 21 days. Your money is best kept in your bank account where it can earn credit interest – sending it early won’t have a positive impact on your credit record or score so what’s the point?
If you are unable to pay the bill then call your supplier and ask for an extension. You will be surprised that most won’t have an issue with it and many will also have payment plans on offer that you could take advantage of. Never ignore overdue letters in the mail! The pain won’t go away unless you address it. If you don’t things can and will spiral out of control until the problem is so overwhelming it threatens the very survival of the business.
Take advantage of Electronic Funds Transfer. When a bill is due pay it on the due date as it will be recorded as being receipted on that day. Although, try and not pay on a Saturday or Sunday as the payment may not be received until the Tuesday – so if the due date somehow falls on the weekend try and pay it on the Friday.
If a discount is offered – assess its value: if someone does offer you a discount then do assess it on merit. Even though I have said previously to avoid giving discounts if someone offers you one and it means that it will save you more money then, of course, take it up.
Managing cash flow is an art and it takes time to get used to it. There will always be times in the life of your business where you may not have enough cash at hand to meet your out goings and you know what? That’s okay. It does not mean that your business has failed it just means that at points in time you need to overcome hurdles and challenges. They key is to ensure that you are doing simple things to keep the business on track and that is why managing cash flow is so important.
Managing cash flow also helps you to stay away from seeking lines of credit from banks and financial institutions wherever possible – once in the credit trap it can take a long time to escape if at all and there are stories abound where the biggest single creditor ends up being a bank even though the money you have borrowed has been to pay a myriad of smaller suppliers. By working with your suppliers at the back end you can mitigate your risks and slightly insulate yourself from potential debt harm and defaults.
By working to ensure you have a robust revenue and sales collection method in place you can also mitigate your risk.
Remember this – cash flow is king for all small business owners and start-up entrepreneurs.
Finally, seek advice from registered or certified professionals wherever possible.
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