The terms “cash flow” and “profit” denote two different things. Your business may experience strong growth and generate a large profit margin, but if you cash flow is bad (meaning that all your money is tied up in stock, for example), you may not be able to pay your vendors. This could damage your business and reputation, and that is why keeping track of money coming in and going out is crucial to your business. Small businesses should be aware of and try to avoid common financial traps, due to their limited budgets. Keep your cash “flowing”, and here is how you can do it.
Make cash flow predictions
Avoid shortfalls and keep track of your finances by setting targets for the next 6-12 months. How to set up a cash flow forecast? Keep a spreadsheet of listing costs and income on a monthly basis, keep track of seasonal variations (for example, during winter the heating bills will probably be higher), and set the fixed and variable costs. This will allow your cash flow forecast to be realistic.
Keep a friendly relationship with lenders
Those who are just starting or running a small business know that, at a certain point, everyone needs a cash boost from a lender or a bank in order to keep the business running. Develop a good, trust-based relationship with lenders and banks, and keep the informed of any changes or unforeseen outgoings in forecasts. In case your business needs some financial assistance in the future, they will be more likely to treat you favorably.
Have access to a short-term loan or credit
Every small business tends to achieve growth and expansion. However, fast growth can lead to serious downfalls if it is not controlled. If your business is experiencing fast growth, you should keep in touch with your financier or bank, and have access to a line of credit like a short-term loan or overdraft. When banks see a letter of intent or draft service contract, they are more willing to lend to a business. You can pay your debt when the client pays you, and you will have to pay for the amount of time you need the cash in the form of interest.
Manage on your outgoings
Tighten things up wherever possible and negotiate to get deals that will be favorable to your business. What is the frequency with which you pay utility bills, tax bills, and suppliers? Is there a chance to make the terms more flexible or pay in installments? Also, search through your outgoings report and see if there are those little things you spend funds on that can add up.
Set clear payment terms and recover debts
There is a 30-day standard when setting out payment terms with suppliers. Set out clear payment terms from the beginning of doing business with them, be quick to chase overdue bills, and send out invoices on time. Keep your customer payment dates in mind, and never ignore delays and irregularities. If there are debtors that are way overdue with making payments, be sure to remind them by making direct contact (personal visit or a phone call), sending reminder letters, or have a good debt recovery agency help you with debt recovery. This will help you keep on top of your cash flow.
Identify potential cash flow problems in advance
Update your cash flow forecast regularly, keep an eye on suppliers and customers who may be about to bust, and monitor market conditions in order to be able to anticipate problems before they happen. When you see a problem, do not hesitate to take immediate action. Not having any cash flow problems allows you to deal with your problems efficiently and quickly. The issue will not go away if you ignore it, so do not bury your head in the sand. If you are having troubles and do not know what to do, consult someone more experienced – a business mentor, investor, or accountant.
It is always difficult at the beginning, when you are setting things up. Fresh and inexperienced business owners get easily distracted with all sorts of problems, and get diverted from essential things such as making sure to stay on top of the cash flow. Not paying attention to your finances is a mistake, because it fuels the business.
John J. Stone is a business consultant and editor at Bizzmarkblog. He is a devout believer in the notion that form should always follow function and that developing the ability to think outside of the box is a prerequisite of being a successful entrepreneur.