Keeping a tight control of your cashflow is the single most important thing you can do when running a business; particularly when you are just starting out. All companies need cash to survive – and thrive – and meeting your financial obligations and having money to invest in opportunities is critical. But how do you manage your cashflow properly, and what are the best methods of doing so? We’re going to reveal all in our guide to managing cashflow – read on to find out everything you need to know.
What is cashflow?
Understanding cashflow is the first thing you need to do if you want to know how to manage it properly. Cashflow is the amount of money that comes in and goes out of our business, and you need to track it on your cashflow statement. A positive cashflow is the ideal, as it means you have more money coming into your business than leaving it, although many startups will usually have a negative cashflow – which means there is more money going out of your business. However, having a positive cashflow doesn’t necessarily say that you are turning a profit, as that money coming into your business could also include borrowing.
Working out a benchmark
So, when it comes to managing your cashflow, the first important step is to work out a reference point – or breakeven point. It’s this point where your business becomes profitable, and it’s an important goal to set for any new business. Not only will it help you achieve a level of safety for your business, but this benchmark or breakeven point is also a way of predicting your cashflow in the future, and can help with your financial planning. The general rules of cashflow are relatively straightforward: know where you are at right now; know where you will be in six months time. You can’t possibly know either of these if you don’t work out your breakeven point first.
Having access to cash is vital for your business, so it’s important to ensure you are getting what you are due as fast as possible. In the vast majority of cases, this task involves getting money from clients and customers. According to research, the average customer pays around two weeks late, so it’s easy to see where many of your problems might arise from. Never invoice people and then leave them to it – remind them regularly and be proactive in chasing them up. You can sue automatic emails at regular intervals before a due date, and if that time passes with no payment, you can also consider imposing late payment fees. Don’t be afraid of chasing money – you have a right to be paid for your work, and the longer a customer leaves it, the more exposure your business will have to risk.
Of course, the money that goes out of your business also has an impact on your cashflow, And whereas you should be encouraging your customers to pay straight away, you should be avoiding paying your suppliers and other payables for as long as possible. We’re not suggesting missing deadlines, of course, as that will attract fines. But by establishing longer credit terms – changing a 60-day payment to a 90-day, for example – and you will find that your cash flow improves by a significant amount.
If your business buys inventory, it’s vital to ensure that you are making sensible decisions about how you buy, store, and manage it. Don’t forget, everything you buy will impact on your cashflow, as it ties up valuable money that you can’t use for meeting your financial obligations or investing in improvements. The fundamental principle of inventory management is to order stock in quantities that you can sell on quickly, without impacting your sales with out of stock issues. It’s a tricky balance to strike, but absolutely essential if you don’t want your cash tied up in inventory that lingers around your business for months on end.
At some point in time, all businesses will experience periods of a shortfall when it comes to cashflow. And one of the best ways of protecting against such occasions is to ensure that you have some reserves put aside – emergency savings if you like. Of course, this can be difficult to achieve when you are just starting out, but it’s something you need to consider if you want to avoid potentially dangerous financial situations arising.
Borrowing money for your business is a great way of improving your cashflow, but bear in mind that you have to counter this by being able to turn a profit. Look at something like a cashflow loan if you need to fund a new marketing campaign that can pretty much guarantee results. While these types of loans can be expensive if you don’t pay them back on time, the funding they deliver can help you achieve your goals far more quickly than saving a little each month and raising them yourself. Small business loans are also an interesting idea, and as long as you research the market and get the lowest interest possible, they can provide you with vital funding to help you pay for your growth strategies.
Boost sales to current customers
Acquiring new customers is an expensive task, both regarding resources and money. So, if you want to increase sales to improve your cashflow, you are far better off trying to sell more to your current customers. Research suggests it is up to six times cheaper to sell to old clients, so it’s easy to see how much value it can bring to your business. Look at what people are buying, and spend some time analyzing their shopping habits. Is there a way of enticing them back with discounts or better deals? However, one thing to bear in mind is that you have to focus on getting money quickly – don’t allow your credit out to build up, or it will just cause you further cashflow issues. The idea here is to make money, not increase your accounts receivable.