It doesn’t matter how big or successful your business is. Cash is key. Maintaining a healthy flow of cash throughout is the lifeline to keeping the business trading.
Simply, if you don’t have the cash to flow through your business, you may not be able to cope with the day to day dealings of running things, let alone your overheads. According to a study in the US, 82% of small businesses close because of cash flow problems.
When setting up your business and planning things out, more likely than not, you will know that at some point you will come face to face with these difficulties. The important this is being prepared for these issues when they hit the business.
Likely causes of cash flow shortages
For the majority of startups, it’s timing. If your business is doing everything it requires to be successful, but your clients won’t pay on time, how do you cover outgoings on time?
It leads to owners being left short of cash and unable to pay bills. Even if your sales are high, if the cash isn’t coming into the business quickly enough, trouble will hit.
Cash flow problems can sometimes occur through no fault of the business. You could be hit with a large unexpected cost that you didn’t see coming, or sometimes new startups will be placed on a higher tariff as they are deemed a higher credit risk.
Ultimately, making sure that you have cash in reserve is vitally important for covering these costs. Having a reserve will also make it easier when it comes to paying quarterly or yearly tax bills.
Good planning can be a huge help in managing cash flow. Taking into account all incomings and outgoings, then implementing them into a cash flow forecast, is a huge part of setting up for any business. An owner has to consider the timing of all incomings and outgoings to make sure they don’t run out of cash.
New startups must also make sure that during the planning process, they take into consideration seasonal variations. Some businesses may rely more heavily on summer or winter months, so it’s essential to spend wisely and make sure you have enough cash for the remaining months.
Planning your benchmarks
Just as it’s important to manage your cash, it’s also important to make sure your business is profitable. If your business is cash positive, and there’s plenty of cash in the till, it doesn’t necessarily mean the business is making profit.
When starting a business, it’s essential to be aware of the businesses breakeven point. This is a term used to describe the balancing point where revenue exactly equals the total outgoing costs.
If income falls below this point, the business is making a loss. If income exceeds this point the business is making a profit. Making sure you know your breakeven point is critical as it allows you to effectively calculate product or service costs and work out your margins.
With marketplaces changing constantly, a business might need to alter their breakeven point, which is why having this set as a benchmark is crucial. This might mean adding a new higher-margin product or service, getting rid of an old one, or marketing to different clientele.
Creating your cash flow forecast
When it comes to starting your cash flow projection, each bit of cash from the previous period needs to be added on to the next one. In this process, you will end up gathering information from the whole business, figuring out where cash will be coming in from, such as client payments, interest earnings, service fees, and the collection of bad debts.
The next part of the cash flow forecast comes from the detailed knowledge of your outgoing payments. This covers what each penny is spent on and when, have a line item on your forecast for each significant outgoing, and recurring future payments, such as taxes that are payable.
Efficiency with outgoings and incomings
Controlling when money comes into your business and when it goes out, might sound like an easy prospect, but in reality, it’s much harder. So, what can you do?
- Carry out credit checks on clients
- Make deposits on invoices the business norm
- Follow up on invoices as soon as you can
- If possible take full advantage of payment terms on your own outgoings
- If you are struggling, talk to suppliers yourself and try to come to an arrangement
There are simple things an owner can do to make sure that cash remains a steady entity within the business. Trying to make customers pay in a timely fashion seems obvious, but not enough businesses stay on top of it, especially startups.
Following up outstanding invoices with your clients immediately is a sure-fire way of staying on top of them and ensuring that they pay within a reasonable time. This can be done with a simple email or phone call to get in touch with a company who hasn’t paid within their terms, alternatively, a business could go down the route of invoice financing.
To reduce the chance of suffering bad debts, check new customers’ credit scores before you offer them credit. Look at how reliable they have been previously at paying can give you a good indication of the risk involved.
Credit checks can normally be done easily and effectively. It doesn’t need to be a lengthy document. Simply have the business name, address, contact information and a list of three former credit references.
This is a company which has recently offered your client terms. You can then get in touch with their references and ask about their payment habits of your prospective customer. There are also a number of companies which sell commercial credit reports, with varying amounts of data dependent on the amount you pay.
Making deposit payments your business norm is another great option for bringing in cash that bit quicker. Getting a percentage of your invoice means you aren’t strapped for cash and waiting for a client payment. Alternatively, if you want a client to pay faster, offer incentives if the business receives its payment within a certain time frame.
In terms of outgoings, taking full advantage of repayment terms yourself can help manage cash flow and give you more time if you’re short on cash. Sometimes the cheaper option isn’t always the best, look for suppliers or utility providers who offer longer repayment terms.
Try to time your expenditures so that they run in parallel to when the business receives its payments. This can be done by trying to coordinate, so that all utility bills, staff and supplier payments are made on the same day.
If you have a clear idea of when money will be going out from the business, it will be easier to plan your incomings around that date. It’s also important to make payments for clients as easy as possible. Cheques always take a few days, so use online payments for instant transfers.
If you are short of cash flow and unable to pay a supplier on the due date keep your suppliers informed and if possible make a part payment until the full balance can be paid. To keep a good relationship with your suppliers, it’s key to be honest with them. As a customer to them, they will want you to succeed and might give you extended terms when it comes to paying them.
Control your growth
Although growth might only seem like a good thing, if you grow beyond your means it can have a serious effect on cash flow. Growth can come at a huge amount of expenditure, additional staff, more stock, larger offices and if you end up having more late-paying clients, more unpaid invoices. If growth is too rapid, everything becomes that bit harder to maintain.
Even large, established companies are vulnerable in periods of exceptional growth. It stretches cash flow and also tests systems and management skills.
How can you get yourself out of trouble?
If you’re already in trouble with your cash flow, thankfully there are solutions available.
B2B businesses can turn to invoice financing, which can be a fantastic option, especially if you have a lot of late-paying clients. Effectively invoice financing allows the business to obtain an advance based on the value of your invoices and frees up a lot of cash.
A factoring company will first asses your invoices and the potential risk involved. They will then advance you a sum up to a certain value of the invoice, before collecting the payments from your clients, taking back what they’re owed before returning any remaining cash.
Not only does this aid any cash flow, it also frees up time for an owner to work on the business, which is especially important for startups.
Another simple solution can be found in the form of a business overdraft. The amount available to you is agreed with the bank beforehand and is designed to meet the business needs. If this is a temporary arrangement and a relatively modest amount the bank may lend unsecured. However, a more permanent arrangement and for larger amounts is likely to require security.
Alternatively, you could apply for a bank loan. The bank will usually ask for a business plan, particularly for larger amounts. In simple terms, this will outline why you need the loan, what it will be used for and importantly how you are going to pay it back. They will also consider the likelihood of things “going wrong” and to that end, with a new business they may ask for security as a backstop.
If despite your best planning, you run into serious cash flow problems, the worst thing you can do is ignore them. Speak to your accountant or contact a licensed insolvency practitioner without delay. They will help you assess the situation, look at what options are available and formulate a recovery strategy.