Explaining cash flow

Explaining Cash Flow - lessons to live by

4 min read

Cash flow is the fuel of your small business. This means you have to ensure not only that the cash keeps coming in, but that it flows smoothly through the system to keep your business alive and functioning.

The first lesson of cash flow

Cash flow needs to be managed. New business owners may make the (crucial) mistake of letting cash flow manage itself. Which tends to have the same effect as expecting your car to fuel itself. Once the gas runs out, things come to a grinding halt.

The second lesson

Keep a positive cash flow at all times. This means the money flowing into your business is greater than the amount of cash flowing out. Without this you can’t pay your bills, invest in growth, or cope with emergencies. Here are five strategies to help keep your cash flow positive from the get-go.

So, how’s it done?

1. Encourage prompt payment.

Whatever else you do, indicate clearly in your contract and on your bills when payment is due and what the consequences of late payment will be. This could entail adding a late payment charge of 2%, for example.

A more positive way to encourage customers to pay promptly is to reward them for doing so. You might offer them a small discount of 2% if they pay their bill within 14 days rather than 30, for example.

If you’re unsure about a potential client, do your research on them before you agree to start your project.

2. Pay money you owe at the last moment.

The wise business owner will pursue a policy of “do what I say, not what I do”. Pay your bills on the day they’re due, and you’ll keep your money in your accounts as long as possible. Financial software such as QuickBooks makes it easy to set up notification features to remind you when bills are due. You can then pay at the last minute without ever worrying about payments becoming overdue.

3. Ask for deposits where possible.

If you provide services, get in the habit of asking customers for a deposit upfront. It’s perfectly acceptable for them to pay a certain percentage of the projected total bill before work begins. If your services involve the cost of materials, such as a landscaper installing a walkway, you can also ask for these costs upfront.

And if you’re providing services repeatedly over a period of time, such as maintenance or gardening, you can pre-sell these services for a set period, such as a year. These continuity sales can be a great source of cash flow.

4. Avoid late payments.

Because cash flow is so critical to your business, it’s crucial that you keep a close eye on your customers and their payment habits. You can’t afford to ignore customers who habitually pay late or not at all. Using financial software such as QuickBooks makes it easy to assess customers’ track records, flag those that need to be chased, and send appropriate payment reminders. If reminders don’t work, consider involving a lawyer, as most non-payers will cave in on receipt of a legal letter. If this fails, the prospect of taking a customer to court is daunting, but there is help and advice available from HM Courts and Tribunals Service.

5. Review your cash flow before you invest.

Need a commercial oven to expand your food business? Feel things are getting busy and you could really use another employee? Want to get a new van to make deliveries?

Whatever you’re thinking of purchasing, get in the habit of first checking your current and projected cash flow before you invest. Make absolutely certain that you really can afford to spend the money before you take the plunge.

Good Cash Flow = Success

There are far more exciting things to do during your first year of business, but there are few things as important as managing your cash flow. After all, you don’t want your first year of business to be your last.

To see how online accounting software can help you track your cash flow, sign up for a free trial with QuickBooks.

We hope you’ve found this article helpful in explaining the impact of good cash flow management on your business. QuickBooks strives to help new small businesses succeed, by providing solutions to help you get paid on time.

Discover QuickBooks online accounting today

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