Freelancers, contractors and SMEs are often celebrated as the backbone of the economy – it then stands to reason that cashflow should be considered its lifeblood.
Understanding and managing your cashflow is a vital part of running a successful business. A huge turnover with plenty of sales might look pretty, but it means little if your financial outgoings are equally large, or the cash that you’re owed isn’t arriving on time – or at all. As the saying goes, turnover is vanity, but cashflow is sanity!
In order to improve your cashflow you need to first be aware of its traffic – what’s coming in and where it’s going out. Then all you need to do is lengthen one and shorten the other – simple!
There are a few cashflow essentials that you should be aware of when running your business:
Make sure you submit your invoices promptly in order to improve your chances of a quick turnaround and ensure everything is on time as promised.
Don’t let perfectly avoidable mistakes your end enable delays – make sure everything’s kosher before you send a final invoice. Half the problems with cashflow arise from delays in correspondence – don’t fuel that fire.
Keep it simple
Simple is always effective – try to cut out anything which may appear superfluous.
Include what you need and stick to that – don’t let complicated communications slow down responses from clients and suppliers.
Monitor your cashflow
Be vigilant of your payments and deadlines and make sure you chase up anything that needs chasing. Proactive reminders shouldn’t upset anyone and if there’s a problem, don’t allow it to develop into a monster! Again, Crunch can help you here with our free late payment reminder templates.
It’s sometimes an inevitability that your cashflow is going to dry up or encounter some troubles, especially in this turbulent financial climate. So it’s best to lay down as many safeguards as possible. Small businesses are particularly at risk from a sudden cashflow shortfall, so make sure you’re prepared! Trying to keep a financial buffer, some rainy day money, is as important for small businesses as it is in your personal life.
A good way to ensure you have a constant flow of cash is to encourage clients to pay ahead of schedule. Providing discounts or credit for early payments is going to make it very appealing for clients to do so. How much should you discount? Calculate how much the average late payment costs you, and work from there.
Charge a deposit
This is a good way of acquiring some cash up-front; it’s also good insurance in the event a deal falls through – providing you’re not contractually bound to return the deposit, that is.
Deposits can pull double duty as rudimentary credit checks too – if a client can’t come up with a small deposit, will they be equally difficult when it’s time to settle the balance?
If you have reservations about a client and want to go the more formal route, or if you’ve had previous dealings with them and their credit has been poor, then don’t make the same mistake twice.
Credit checks on UK limited companies are incredibly easy to come by, and it can be useful to get a professional opinion before extending credit to a client.
Expanding sales don’t equal profit
Mastering cashflow boils down to managing the relationship between your sales and expenses, and when you need to pay the latter. When sales are up, there can be a temptation to take your eye off the ball. Don’t allow increasing revenue to lower your guard, as increasing sales usually mean increasing expenses. Don’t forget to plan for these expenses, and calculate any upcoming tax payments. At Crunch, this is where we could help, our simple online accounting software can help you keep on top of your invoicing, expenses, and give you a clear picture of the financial health of your business.
Flexible beats cheap
Low price suppliers are not necessarily better than flexible payment suppliers – the lowest price isn’t going to matter if you haven’t got the funds in the first place. Having more time is going to be much more helpful than a lower total cost in many cases. Keep this in mind when choosing your suppliers, and bear in mind your suppliers will have their own cashflow to worry about.
Solutions to cashflow problems
If you do find yourself with cashflow problems there are ways to tackle the situation and lessen the impact on your business.
The first step would be to conduct a damage assessment of your cashflow and prioritise your payments accordingly. Remember that it’s very easy to fall into a ‘debt spiral’ with overdraft charges and late payment penalties mounting up. Clever planning is crucial.
Having a good rapport with your clients and suppliers will allow for some leniency and flexibility around temporary cashflow problems.
A good working relationship is going to go a long way – especially if you have a long-standing relationship and the supplier doesn’t want to lose your business.
If you need a quick cash injection but find the banks are shutting the door in your face, there’s a growing list of alternative options.
You can try your suppliers, as it’s in their interest for your business to remain profitable, you could look at peer to peer lending, or even consider crowdfunding as a source of fundraising.
Free up assets
Look at your assets and consider which are an absolute necessity. Could you manage without a particular item? If so, sell it off.
If you’re unwilling or unable to part with an asset, consider leasing it out. This will allow you to retain your assets and bring some cash into the business quickly.
A straightforward and sensible way to stay on top of the money flowing in and out of your business is through a cashflow forecast. This simply means calculating your income and your expenses, and subtracting one from the other. We’ve produced a simple-as-can-be weekly cashflow forecast to get you started.
It includes line items for client invoices, supplier expenses, subscriptions and PAYE salary.