Small businesses, especially, walk a fine line between accounts receivable and accounts payable, collecting on invoices while paying suppliers and other expenses at the last possible moment. In the pre-COVID “business as usual” world, small businesses could keep accounts running like clockwork, maximizing the use of their cash to grow business. But even the most carefully managed finances couldn’t outstrip the cash flow crisis brought on many businesses by the pandemic crisis.
In 2020, cash flow has become king. Profits are positive, but if money is tied up in stock, you can’t pay your suppliers and your business suffers. It’s imperative to keep cash flow in check to avoid problems. These 7 tips can help you get started.
1) Maintain a Cash Flow Forecast
Set targets for the next six to 12 months to keep track of finances and avoid any shortfalls. The most basic way to set up a cash flow forecast is to maintain a simple spreadsheet listing income and costs on a monthly basis.
Take note of any seasonal variations, such as heating bills going up during winter. Factor in fixed and variable costs to your cash flow forecast and be realistic: include every item.
2) Stay on Top of Payments
Send out invoices promptly and be quick to chase overdue bills. It’s also worth setting out clear payment terms with suppliers from the start of doing business with them. Thirty days is standard but, in a pandemic, you may be able to work out shorter terms.
Get to know your customer payment dates and don’t ignore irregularities or delays; a poor paying customer might be about to go bust. Knowing when you’re due to be paid for a product or service will help you keep on top of your cash flow.
3) Watch Your Stock Management
Efficient stock management is just as important as managing cash flow. Reconcile your stock records at the same time you reconcile your bank account, whether that’s weekly or monthly. This way, you will remain on top of items you have left in stock and those that require reordering.
An efficiently managed stock control system will have a positive impact on your cash flow because you will never find yourself either holding too much stock or having all your money tied up in it.
4) Stay Friendly With Lenders
Many businesses need a cash boost from a bank or lender every now and again, particularly when they’re starting out, and might need credit or an overdraft to get up and running. Stay on good terms with them, keeping them informed of any unforeseen outgoings or changes in forecasts.
By developing a good relationship based on trust with banks and lenders, they may be more likely to treat you favorably should your business need future financial assistance.
5) Access credit
If your business is growing rapidly—for example, you’ve just won a new contract from a client and you’re worried about having enough money to meet your overhead—seek access to a line of credit from a bank or financier, such as an overdraft or short-term loan.
In many cases, this will be a viable option because banks are more willing to lend to a business if they can see a draft service contract or letter of intent.
Once the client pays, then you can pay your debt. You will only have to pay interest to the bank or financier for the amount of time you actually need the cash.
6) Tighten Up on Your Outgoings
Assess the frequency with which you pay suppliers, tax bills, utilities, and so on. Where is it possible to pay in installments or make terms more flexible? You may be able to negotiate deals that are favorable to you and your business.
Also, watch all those little things you spend money on that can add up. You might be surprised how watching pennies helps the dollars shore up.
7) Anticipate Problems Before They Happen
Identify potential cash flow problems in advance by regularly updating your cash flow forecast, monitoring market conditions, keeping an eye on customers and suppliers who may be in trouble, and taking action as soon as you see a problem.
Don’t bury your head in the sand and hope an issue will go away. By keeping on top of your cash flow, you’ll be able to deal with problems quickly and efficiently. Also, if worried, talk to an accountant, investor, or business mentor.
Be Prepared With the Right Financial Systems
You won’t be able to prevent every cash flow crisis, but the more warning you have by observing data and trends, the better prepared you will be to manage through the crisis. You can do that with the help of the right financial and accounting systems and a team of professionals that can help you implement and integrate those systems for optimal use. The team at ASI has been helping businesses find the right software solutions for more than three decades. Let them help you assess your needs to support cash flow management. Request your free software consultation now.