As a business owner, cash flow management can often be seen as less important than profit margins and the number of clients you have. However, monitoring, measuring and managing your business cash flow successfully is an essential part of keeping the company running. Here we look at some of the ways in which you can manage and improve cash flow, to avoid causing problems for the business.
Understand your current situation
The first step to improve cashflow is to know exactly where you stand financially at the current time. Cash flow management is about more than just seeing how much money is coming into the business. It needs to look at what is going in and out of the business over the last week, month, quarter or year. With a cash flow forecast you then see whether or not the business is actually building up its cash reserves over a specified period of time. If a business seems to have plenty of jobs coming in, but it’s not receiving money in on time, it could find itself in a dire financial situation further down the line. There are some simple ways to measure and manage your business cash flow. For example, understanding how long you need to cover an expense before you are paid by the customer. Spending time tracking cash flow and seeing how you can improve it is a critical investment to make in your business. A cash flow forecast should never be finished. It needs to constantly be reviewed and updated, so that it’s an accurate reflection of where the business is.
Know what the cash flow problems are
If you don’t manage your business cash flow correctly, problems can occur from spending too much or receiving too little over a period of time. If either of these occur, then it can quickly create a problem for the business. In order to improve cash flow you need to understand the basic costs that are necessary to keep the business running. There may also be periods in the year where you may need to invest more in the business, for instance to take advantage of a new contract or to buy new equipment. However, it’s essential to ensure that these growth periods don’t deplete your cash reserves too much. There also needs to be a regular stream of money coming into the business in order to keep the reserves topped up. This is particularly important for businesses who manage large projects, where full payment might not be received until the end. When contracts are negotiated ensuring that payments are spread in a manageable way is essential.
Maintain your business cash flow
With a successful cash flow forecast you can help to prevent problems occurring in the first place. You need to look at what your fixed expenses are and ensure that these are manageable, even during slow periods in the business. First instance, can you reduce the workforce and hire extra staff only when necessary or lease equipment, rather than investing heavily at the beginning? If your business needs to purchase large amounts of stock or materials make sure you wait until they are actually needed. Having large quantities of materials sitting in warehouses when they’re not required won’t help to improve cash flow. It’s also beneficial to agree terms with suppliers that enable your business to defer payments over a longer time period.
Manage late payments
Keeping track of your unpaid invoices is critical to manage cash flow. It’s important to establish clear payments terms with customers in the beginning, so that there is a regular flow of money into the business. When you know when money is coming in it makes forecasting cash flow much simpler.
Ensure you have other options
Even with the best cash flow forecast there may still be times when the business is short of funds. Therefore, it’s important to ensure that you have alternative sources of funding. It’s better to plan ahead for these situations, as banks are more likely to provide credit for businesses who have a healthy cash flow, rather than those who are struggling. Depending on the size of the business and the sector you operate in, there may be grants or other financing options that you’re eligible for. For example, local authorities might offer support for small businesses or for those looking to invest in certain equipment.
Manage the growth of the business
Managing cash flow becomes more challenging for companies who are experiencing rapid growth. Those that are consistently growing and increasing their business over a longer period of time are more likely to be able to manage cash flow successfully. Keep an eye on finances and ensure that there is a clear reason and return for every investment that you make. The more profitable businesses are those who manage the money coming in and out and have a clear cash flow projection.
Improve your business cash flow
In order to successfully manage cash flow and plan for the future, you need to ensure that the business is receiving money owed in on time. At CEA Limited we have a team of experienced debt collectors who will support your business to collect late payments and unpaid invoices. We have a simple, comprehensive approach to debt recovery in order to maximise our collection rates. This includes outsourced credit control, pre judgement recovery service and high court enforcement.
More Information
Top tips for stress free debt recovery services