Business that fail tend to fail because of cash flow problems.
Good cash flow management means ensuring that you do everything within your power to ensure that money flows into your business as quickly as possible and also that it exits your business as slowly as possible. It also means planning for the future and trying to avoid potential problems in the future.
To help we have 7 tips to help improve your cash flow:
1 Profits Do Not Equal Cash
Business with great profits are just as likely to fail as unprofitable business if badly managed. If money is not collected in a timely way or too much money is taken out out the business by the owners or management then there could be problems.
2 You must Forecast.
Your cash flow forecast will not only help you understand your future cash situation it can help you spot any surprises and take steps to mitigate them before it’s too late.
There are plenty of tools to help with this, we recommend
3 Its not complete until it’s in the bank
Your monthly budget may be balanced and your P&L looks good, but if a client payment is not received before your monthly bills must be paid, then you may have a cash flow problem.
4 Understand Seasonality
Business seasonality has a big impact on cash flow. If you run a seasonal business then many of your outgoings (inventory purchases, staffing costs) are made before you sell anything. There may be times when you have plenty of cash in the business, if you have a few months or low volumes then that could be used up quickly, refer to point 2 (forecasting is key)
5. Plan for the Unexpected
Unexpected expenses and emergencies such as illness, a natural disaster, the loss of your star sales person, and so on, can all impact your bottom line. Have a plan to prepare for these eventualities, whether it’s having a financial cushion, a succession plan, business insurance, or cross-training key sales personnel.
6. Be on the ball with invoicing and collections
Late paying clients are a real problem for small businesses. Look for ways to overcome this burden by invoicing promptly, setting up invoice reminders (these can be automated in Xero). Collect and chase payments as soon as it looks like your payment terms may be in jeopardy.
7. Be Ready for Growth
With growth comes additional costs – inventory, equipment, marketing campaigns, etc. Forecast these that you can see if you need finance.