One of the first priorities for any small business is maintaining a positive cash flow.
Without it, even companies that are profitable on paper can go out of business if they can’t service their imminent payables. While positive cash flow can be fed back into the business, allowing it to grow, companies that experience regular negative cash flow are more likely to end up going out of business. Here are 5 tips for ensuring you stay on top of your small business cash flow and keep it healthy.
1. Create a 13-week rolling projection.
This is a valuable tool for forecasting when cash sources will be available and when you’ll need to pay out on capital and operating expenses. You’ll need to understand your own business cash cycle to make an accurate forecast – for example, the length of time it takes for your inventory to become a receivable and finally cash. A 13-week cash flow forecast allows you to include both monthly and quarterly debt payments. As the short term is the most easily predictable, this forecast will help you to protect your cash flow.
2. Follow up on your invoices.
Most small business cash flow problems are the result of receiving payments late. To minimise this risk, confirm receipt of invoices by email and send a friendly reminder a week before payment is due. In addition, ensure your terms of payment include late payment penalties and consider offering suppliers an early payment discount if you’re worried about a cash flow shortfall. Finally, try to get the most favourable terms for your own repayments – ideally, as good as or better than those you offer to your customers.
3. Extend your credit line.
Securing a bank loan or a short-term cash advance can help a small business to survive a period of negative cash flow. However, it is best to consider financing alongside cost-cutting measures to ensure you make the most profitable use of the extra cash and don’t borrow unnecessarily. If your credit line is already extended beyond comfort, you could consider additional shareholder or third party investment as an alternative means of raising extra cash.
4. Review financial statements.
The current ratio – current assets divided by current liabilities – will give a good indication of your company’s operating efficiency and how well it can turn its product into cash. A ratio under 1 is a warning sign that your business may not be able to service its financial obligations if they became due. Once you identify a problem, you can take corrective action to resolve it.
5. Prioritise positive cash flow over profits.
One mistake small businesses often make is overtrading. This happens when companies expand their operations too quickly or aggressively. Growing sales faster than your working capital can sustain can quickly lead to large accounts payable or accounts receivable with the net result that your business cash flow dries up completely. Make cash flow your number one priority and the profits should manage themselves.
With careful planning, thorough accounting and prudent business practices, you’ll maintain a healthy cash flow that will build your business for long term success.