We’ve all heard the sayings that in the world of business, ‘cash is king’ or ‘revenue is vanity, profit is sanity and cash is reality’. As a business owner cash flow is one of your top priorities and, if not managed properly, has the potential to cause you a lot of stress and sleepless nights. Whilst your business may be anticipating profits in the next few months, if you don’t have enough cash coming in to cover your expenses during that time, you may be forced to borrow money to finance cash flow, meaning you won’t get a chance to realise those earnings. You can have a profitable business with a negative cash flow, which is one of the main reasons why businesses fail.
There’s a simple strategy for cash flow: collect your receivables as fast as possible and slow down your payables without jeopardizing your relationship with suppliers. That’s the simple version but if you’re serious about improving cash flow, here are six tips from Dümmer and Neal Accountants:
1. Partner with your bank
It is essential to have a good working relationship with your bank in order to maintain a positive cash flow for your business. A go-to business banker who fully understands your business can be a valuable ally when applying for new lines of credit. If your bank has a rewards program, consider using your business credit card to pay suppliers and make purchases. Learn about your card’s grace period, and take advantage of it – you may have up to 30 days after receiving your statement to make the payment. Having an emergency line of credit in place to cover short-term needs and emergencies such as an overdraft or access finance is a good way to manage your cash flow rather than trying to get a loan in a hurry.
2. Debtor finance
Entrepreneurs should investigate alternate sources of securing working capital and not limit business funding to conventional methods. One way is through debtor finance in the form of either factoring or invoice discounting. Factoring is when a business sells its debtors to a third party at a discounted price and the third party then becomes responsible for collecting monies owed by those debtors. Invoice discounting is a form of borrowing using the business accounts receivables as collateral for a loan. Businesses can now get instant access to invoice discounting via various service provider apps that integrate with your accounting package. These apps use algorithms to assess debtor accounts which can then be used as collateral for short term finance when required.
3. Evaluate payment terms
Regular communication between the business, customers and suppliers needs to be maintained to ensure favorable payment terms. If the average payable is 20 days and the average receivable is 45 days, this results in a 25 day period that the business needs to finance working capital. If the payment term gap gets too high, this could hinder the business as it finances working capital through costly debt. Maintaining good relationships with suppliers can also be used as leverage such as requesting a payment extension for a project where receivable terms might stretch past 30 days.
4. Speed up receipt of cash
Implementing strategies to shorten receivables will boost cash flow for any business. Send out invoices immediately after the delivery of goods or services rather than wait for a month-end billing cycle. Offer a small discount to customers who pay their bills early and charge a penalty to those who pay late. Set all non-regular customers on COD payment terms. Ask for up front deposits on jobs that require large cash outlays for equipment or from customers that you know are notoriously bad payers. Monitor your receivables on a weekly or bi-weekly basis and follow-up with late payers when appropriate.
5. Prepare a budget and cash flow forecast
Prepare a monthly budget and cash flow forecast to track actual cash in and out against projected cash in and out of the business. A forecast could be as simple as pen and paper for a start-up but most established businesses will want to put together a more formal cash flow projection such as a rolling 12-month forecast. After consistently mapping out a weekly cash flow the data starts becoming more predictable and easier to know when to expect surges in expenses ahead of peak sales seasons and where several payments might come due all at once. These tools will enable you to better control where the cash is going and prioritise future cash expenditures.
6. Work with your accountant
The services of an accountant can serve as an investment rather than an expense. Your accountant can review cash flow projections and results, help you anticipate and plan for cash flow problems and provide insights into areas that you may have overlooked. Many business owners simply do not understand the true financial position of their business. Some do not ensure accurate and timely financial reporting whilst others don’t understand the numbers put in front of them. Whilst you may consider it your accountants primary function to produce the numbers, they can also be an advisor to help you interpret your numbers and help you focus on the areas of your business that need improvement.
As a business owner, having timely and accurate monthly financials with the correct comparative data is essential to assessing both business performance and identifying new areas for growth. At Dümmer and Neal Accountants we see many small businesses needing a bookkeeper for a couple of days per month and a financial manager for one or two hours a month. We specialise in providing monthly support to business serving as bookkeeper, financial manager and tax consultant. Our solutions are individually tailored to suit you and your business needs with a focus on securing your numbers to grow your business. Get on board with us and we’ll guarantee an increase in the predictability of your monthly cash flow.