It’s easy to see why 42% of UK SMEs feel that ash flow can be a serious obstacle to their business success A brilliant marketing plan, the perfect premises, products or services with world-class appeal – all these things fall to the wayside without the liquidity to make them work.
Managing your cash flow doesn’t need to be difficult, but it does require diligence, attention to detail. Here are 5 ways to get it right!
Make the most of digital tools
Accurate, regularly updated records are an essential for any business but they’re particularly important when it comes to managing your cash flow. The best way to ensure that you’re keeping on top of the money going in and out of your business is to use one of the many digital tools available. These give you easy access to information on trends, margins and more. Crucially, they also give you digital backups of your accounts, stored in the cloud, that protect your accounts from potential data corruption or lost – a catastrophic and all too familiar occurrence for those that use offline spreadsheet software.
Look to the future
Once you’ve set up your day to day cash flow monitoring, it’s time to move onto forecasting and anticipation.Getting a grip on what your cash flow will look like over the next 6-9 months will allow you to make informed decisions about buying stock, hiring additional staff and other important, or seasonal choices you might have to make. Not only that, but it gives you a chance to predict upcoming and potential shortfalls in cash and take action. In many cases, this will mean moving current profits into a cash reserve to cover those periods with minimal hassle.
There are many more niche applications however, depending on how your market operates. Seasonal businesses for example, often find that closing the business in the lows of the off-season is actually more profitable than operating it!
Keep a cash reserve
Building and maintaining a cash reserve will provide your business with an invaluable safety buffer to protect against unexpected events. It should be part of an overall disaster recovery plan that you draw up to ensure that your business can survive hard times: less than 10% of companies survive a major disaster when they have no disaster recovery plan in place.
Cash reserves aren’t just used to cover negative cash flow events though, they also open doors for you to seize opportunities. Investing in stock at the optimal time, expanding your services to meet a seasonal demand and being able to cover the cost of refurbishment are just a few examples of how a cash reserve can be used to fund business growth.
Be warned: sloppy invoicing habits can easily throw your cash flow into chaos if left unchecked, and it’s a remarkably common problem. Invoice promptly, and when customers are late in payment, polite but firm communication is almost always the way to go. If circumstances are exceptional, you can make allowances but these should be rare and carefully selected. A staggering two out of three small business have had to write off bad debt, the implications of which can range from irritating to completely crippling.
Consider credit checking your customers
To many, running a credit check on a potential customer might seem like excessive snooping or even a waste of money. Untangle personal reservations from the hard facts of business however, and its uses quickly become apparent. After all, small companies in the UK that regularly credit check their customers are roughly 30% less likely to fail in their first year. No matter how great a customer is in every other regard, if they’re teetering on the brink of insolvency then their input into your cash flow needs to reflect that uncertainty. By all means take them on as a client, but label them as a potential risk and don’t rely too heavily on them as a source of income for any projections.