More than growth or profit levels, cash flow governs the daily survival of every business, making a healthy cash flow management vital. A healthy cash flow management gives you a clear picture of whether the business is under- or over-trading.
It gives you the visibility you need to plan to grow and to make sure your business carries on regardless of unexpected circumstances, such as when a large amount of business is suddenly lost or when clients take longer than usual to pay their invoices.
Another benefit of having a healthy cash flow is that more cash on hand allows you to avoid debt, and paying high-interest rates and late payment charges on credit purchases. Here are some tips on how to keep your business’s financial liquidity in good shape.
- Have a Good Idea of Your Revenue and Expenses
After a few months of running the business, you should be able to make a good estimate of what your business experiences in terms of expected cash inflows and outflows. Look at things like the business’s sales cycle, the payment terms you provide your customers and what your suppliers give you, as well as other factors that may affect how cash comes into the business.
You should also estimate what goes out of the business monthly. This includes overheads like rent of the office space and hires purchase agreements on equipment and vehicles, salaries and taxes. Having a good understanding of the monies that go in and out will allow you to create a budget and give you an idea of how much cash on hand you need monthly to meet your mandatory expenses and generate a profit at the same time.
- Make Invoicing an Easier Process
Many business owners are hesitant to chase their clients on late payments, however, to protect cash flow management every business should invoice promptly and be clear with customers and suppliers on the payment terms at the beginning of the business relationship.
Bill your clients immediately after a completed job – invoicing them at the end of the month means you get paid later. If possible, automate your invoices to ensure accuracy in your books and save time.
- Look Ahead with Cash Flow Forecasts
While having a good idea of your monthly revenue and expenses is necessary, you should also review your monthly budget on a weekly basis so that you are on top of any seasonal peaks and troughs the business experiences.
Having a healthy cash flow forecast allows you to prepare for any large expenditures you may need to make on short notice and can be as simple as a concise version of your monthly budget estimates.
- Run Cash Flow Stress Tests to Stay Out of Danger
Another good way to stay safe is to stress test your liquidity. Ask yourself if the business can handle a 5% increase in business followed by a sudden 10% dip and still keep going? Such flexibility is a good sign that your cash flow position is strong enough to avoid shocks. If the business would struggle under such circumstances, adjusting the way you trade will help ensure you hit the sweet spot of growing to your potential without risk of over-reaching.
- Have a Backup Plan Just in Case
Should the unforeseen happen, ensure you have a contingency plan like a line of credit or some spare cash ready. You should also get these facilities in place before you need them; don’t get to the point of needing cash to fulfill orders before you speak to your bank or other finance providers to obtain Plan B.