Cash flow for a small business owner is one of the most critical financial terms that you can learn about. When you want to better appreciate how your business performs, getting to grips with cash flow is vital. Cash flow problems are commonplace in the business world and make it hard to run your business efficiently, but effective management can help you avoid these problems.
WHAT IS CASH FLOW?
To define cash flow, think about it as the timing of money heading in (and out) of your business. Many see cash flow and profits as one and the same, but they have some notable distinctions. Your business can be profitable but suffer from cash flow concerns. Cash flow, then, is the net amount of cash that is moving in and out of your business on a regular basis.
So, if your business is to be a success it requires a consistent positive cash flow. Normally, a business will be viewed as secure (or not) by its ability to allow cash to move through naturally. While understanding cash flows can be relatively straightforward, managing them can be harder to deal with. If you wish your business to be strong financially and have a greater level of security in its financial performance, you need to put in place the right processes to achieve a strong positive cash flow.
A well-managed cash flow, then, is necessary to a healthy, happy business long-term.
An important element when it comes to dealing with cash flow is managing receivables. Failure to do so has a negative impact on your business, partly as many business owners do not fully grasp the difference between cash and receivables. Receivables is the value of sales invoices currently sent out by your business but not yet paid up, the amount of cash that is outstanding but due to your company. So, if you have provided a service to a client they are yet to pay for, this would be deemed as a receivable. Until paid to you – in full – this is known as an outstanding invoice or receivable. For many businesses, it’s often the most common reason for cash flow issues: waiting for receivables to be settled by clients or customers.
Receivables are not something you can afford to simply wait for, either. If your business is presently having financial difficulties due to the time spent waiting on receivables, then you should look at improving the speed of settlement. While you might be due this money, it’s critical to make sure your receivables don’t stay outstanding for too long. You will invest in and improve your business based on the sums of money you can bring in. A failure to collect money could see your business struggle to pay for the improvements you have committed to.
Be aware of the terms of payment you offer to any customer, such as 7, 14 or 30 days from the invoice date, or delivery of goods. Think about offering a small discount for earlier payment to major clients and put in place mechanisms to remind them when outstanding invoices fall due for settlement. Follow up on any overdue amounts. Since you need to take into account the time it takes for payments to be processed, consider that you could be waiting 30 or more days from a sale to receiving your money. Make it easy for payers to settle directly into your bank account so there are minimal delays in clearing funds.
Another key tool to controlling cash flow is to prioritise payments to balance against your inflows. A lot of suppliers will look to provide an invoice for goods or services with a stated payment date on the bill. Others might request payment in advance. Be aware of when bills such as rent, electricity, taxes and other overheads are due to be paid, as well as those costs relating to the day-to-day operations.
You should build a chart of all your payment dates as cash flow problems can emerge from some suppliers expecting instantaneous payment. Remember that funds are not available to spend until you have access to them: it’s best to not start making investments until you have sufficient money in your bank, or you may put your business at risk.
FINANCING YOUR BUSINESS – OVERDRAFTS, LOANS, EQUITY
Next, you should look at making sure your business can get access to the finance that it needs. For example, you may have to take out a bank overdraft facility, a loan, or raise new equity to handle short-term or long-term cash flow worries. Try to match the term of any financing to the timing of your cash flow concerns, or the likely return period from any new investment. This means you are able to bring in the right resources to complete jobs, using the receivables to finance any repayment. While it can be frustrating, you cannot allow your business to stagnate due to a lack of finances coming in.
If you are dealing with immediate cash flow issues, then you should look to utilise a short-term financial solution like an overdraft or a bridging loan. Recognise that your likelihood to receive access to this kind of assistance will stem from how strong your routine cash flow is. If you consistently have cash flow problems, you may need to make more changes than can be covered by a short-term bridging loan. Consider the costs of any financing, adding in any interest payments and repayment schedules to avoid failure to repay this.
GETTING HELP WITH CASH FLOW MANAGEMENT
If you are struggling to manage the cash flow side of your business, you can reach out for help at Devonshire Green. We can take a look at your cash flow and advise you on how to make decisions to improve the ways money moves through your business.
It’s a tough thing to get right, but it can be done. If you want to maintain a healthy business, it pays to have sound control over your cash flow. With our help, you can make sure you have just that. Moving quickly could see your business come out of a negative financial situation sooner than you might have previously expected. Call Devonshire Green and speak to one of our experts.