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If you cannot manage your cash flow within the first year of trading, you will likely suffer in the second year. In fact, 82% of businesses fail due to poor cash flow management signifying that many business owners only have a limited understanding of how cash flow management aids business success.
However, there are easy steps you can take towards managing your business' cash flow more effectively and promoting growth. With this in mind, here are seven expert tips on how you can successfully manage your business' cash flow:
1. Monitor your cash flow online
One of the easiest and most accurate ways to keep an eye on your cash flow is with the use of technology such as accounting software. Online accounting software is a big time-saver for many businesses, making it easier to reconcile accounts and produce reports. With many accounting software packages now being cloud-based, you can easily stay on top of your cash flow wherever you are whilst still keeping your information secure.
2. Forecast your cash flow
An accurate cash flow forecast can alert you of trouble before it strikes. Prepare your cash flow projections for the remainder of the year, the next quarter and even the following week to ensure you are always aware of the situation.
By putting together a detailed forecast you can estimate all the cash coming in and going out of your business: you can see when you are expecting monies from customers and when you have to make payments. Ultimately, the forecast will show how each transaction will affect your business cash flow. It will help you spot when you may need additional funding as well as identifying and planning for difficult months ahead.
3. Keep a cash reserve
How much cash reserve you should have in place can vary depending on your business. However, no matter the industry, every business should expect cash shortfalls and always be prepared. By always maintaining a cash reserve you can avoid stressful times if you're facing challenging months. You are then able to keep your focus in improving your business and continuing to grow.
4. Recognise your breakeven point
Determining your breakeven point helps you understand how much income you need to generate in order to cover your costs of operation. You should recognise when your business will become profitable. Keeping in mind your breakeven point should be regarded as something to aim for whilst effectively managing your cash flow. Arguably, the most important aspect in business is managing your cash flow, then your goal to realise business profits.
5. Find the right finance for you
Luckily many businesses now have a wide range of options when it comes to finding finance to help them grow. The most important step here is understanding which option is right for your needs. Here are some examples of the various types of external finance that may be available if you need a helping hand:
Bank loan - one of the most commonly chosen finance options. The loan will be fixed over an agreed period, with a fixed rate and monthly repayments. Eligibility for this can be dependent on how long you have been trading for.
Peer-to-peer lending - this is a form of borrowing without using a traditional financial institution such as a bank or building society. The lending involves individuals or ‘peers' where you are matched up to people willing to invest in, and lend money to, your business.
Merchant cash advance - an alternative financial solution if you have strong sales and good volume of card transactions every month. You receive a lump-sum payment to be repaid via an agreed percentage of your future credit and debit card transactions.
Business credit card - stay in control of your business expenses and keep your cash flow moving. A business credit card is a short-term flexible way to manage expenses.
Before moving ahead with a new finance plan, speak to a finance adviser who can help you compare all types of loans and alternative lending solutions that fit your requirements
6. Make payments easy for customers
Make the payment process as simple and easy as possible for customers. Try to avoid being paid by cheque as this can result in a delay in receiving the funds into your account. Online payments are fast and efficient, you could get paid even quicker with mobile payment solutions. If you sell products and services at homes or away from the business premises, consider a mobile payment app to accept payment by credit or debit card so you never delay a payment.
7. Stay on top of invoicing
When agreement to purchase is made, ensure that you identify the exact person, job title and address you need to send the invoice to as this avoids any unnecessary delay of the invoice getting lost or being passed from one department to another. Your invoices should be easy to understand and straightforward with the key areas such as amount due, payment due date and where to send payment made clear. Always follow up and ensure the correct person has received the invoice. Email the invoice instead of posting it where possible to speed things up and make it a key point to provide the invoice as soon as the work is complete or products are delivered.
