Cash flow is the lifeblood of many small businesses but we all know there are leakage points. So how do we manage them and reduce the stress on our cash flow?
Here are our top 10 tips to help you manage your cash flow and operations to ensure your business grows at the pace you want.
1. Close Relationships With Suppliers
It is easy to overlook your suppliers when you are setting up a new business and trying to get it off the ground. But it's really important - and we recommend you pay greater attention to it.
Here's why: Your suppliers are half of your operating cash flow - they can demand payments, not provide you with the level or quality you require to meet you sales objectives or even withhold stock or vital services altogether.
Having strong relationships with your suppliers can lead to greater flexibility around supply and payment options. As a startup or young business, the peaks and troughs of sales can mean you need flexibility from your suppliers and a close relationship, based on trust, can help your business weather these fluctuations.
2. Customer Service / Relationship Management
Equally, your cash flow from operations is dependent on your sales pipeline so it is a good idea to think of your current clients as your cash cow, keeping your cash flow going as you look to build new business.
It is so easy to overlook existing customers in the pursuit of new business despite not meaning to. Relationship marketing is a new term used for good old-fashioned, customer service where businesses value their customers and show this through creating added value. This could come in the form of regular communications to keep customers up-to-date with things, special offers just for them or simply a regular courtesy call.
Whatever method or tactic is best for your customers, ensure they feel part of your business, because they are certainly part of your operating cash flow!
3. Forecast Regularly
This is an integral part of managing your cash flow from your operations because it looks at the whole picture (your sales pipeline compared to your operating sales costs) and shows you instantly if and where you may have a problem.
Cash flow forecasting should be done on a regular basis to ensure your business isn’t heading for disaster or, equally, is about to grow beyond your current capabilities. “Regularly” means different things to different businesses and should be done to a frequency that gives you the information you need to make decisions about your business.
4. Embed Financial Management Deep in your Company Culture
Managing your cash flow is the responsibility of your whole management team and, as the company grows, the responsibility of the whole workforce. The amount of responsibility will be diluted as you go down the hierarchy but the principle is the same – the cash flow of the business is the lifeblood of the business and everyone can have a positive or negative impact on it.
For example, sales and marketing efforts can grow the sales pipeline but if the customer-facing staff aren’t providing excellent customer service or care, those efforts will be in vain.
It is essential all members of staff are aware of the importance of cash flow to your business and exactly what role they can play in it to improve it.
5. Review Regularly with your Management Team
This will help to coordinate each team’s efforts and ensure they are all following the same strategy to maximise your cash flow and business success.
Regular meetings, regardless of the size of the team can also give you the dedicated time to discuss the most recent cash flow forecast and any additional scenarios. After all, a forecast is only of value if it is analysed.
6. Plan for Different Scenarios
Planning and forecasting different scenarios can help you to grow your business based on changes in the market, the economy and within your business itself.
For example, would you know what leadership decisions to make if a major client went out of business? What if they hadn’t or couldn’t pay your invoices? Would you know how this would affect your cash flow and what remedial actions you could take to minimise the impact?
Another common scenario many businesses don’t foresee is a significant employee leaving and the impact this could have on the cash flow from their operations within the business.
Annual or six monthly scenario forecasting and planning can significantly reduce the impact these circumstances could have on your business and its ability to meet your growth plans.
7. Check Your Payment Terms
As part of your regular team meetings and forecasting, it is a good idea to review your payment terms and those of your suppliers because if there is a significant difference between the two, you could have a cash flow problem which could be easily resolved. If your suppliers have seven day payment terms but you have 30 day payment terms, you could be paying out for goods or services 23 days before you are being paid for them. This could be reducing the company’s ability to reinvest in the business or meet other growth plans.
8. Identify Bad Debt Early
This sounds obvious but is so often overlooked in the everyday running of a small business. There is also the question of addressing a debt issue with a customer because you don’t want to jeopardise the relationship with them, especially if they are a significant customer.
The best way to manage any debt issue is directly and immediately. Set up a communication process to address debt issues as soon as they occur. Most times, the invoice has got lost in the system and is paid immediately after the reminder but if this is not the case you can flag this up immediately and an altered forecast can be produced to help you manage the situation if and when it develops.
9. Keep On Top of your Stock Levels
If your business is running with incorrect stock levels, it could be eating up your cash flow. Too high levels of stock could mean your cash is tied up in stock or too low stock levels could mean you are having to pay over the odds for urgent stock to meet sales demand. This could be a particularly dangerous situation because this unplanned purchase could require cash which isn’t in the business.
Stock level management can help you to adjust ordering levels in line with your forecasted sales giving the cash flow within the business the best chance possible of coping with any sudden changes in order levels.
10. Check the Timing of your Invoicing
Simply changing the date in which you issue your invoice could mean the difference between good cash flow and bad. For example, many businesses process all of the invoices for the month on one day at the end of each month ensuring payment within the next working week. So, if you issue your invoice for the month on the first of the next month (i.e. invoice January’s sale on February 1st) it won’t get processed and paid until the end of February. However, if you issue your invoices at the end of each month, it is more likely to be processed and paid sooner.
We hope this post was useful for you and if you have any other questions about cash flow forecasting or management, why not get in touch or read some of our other blog posts. We also have an FAQ page which is frequently updated with the most common questions we are asked.
You can also find us on Google+ and Twitter for all the latest news on forecasting software and information.