10 tips on effectively managing your business cashflow

You often hear the quote “Cash is King” and this is absolutely true as many ‘profitable’ businesses go bust. This seems strange but I always remember being taught during my professional accountancy training that:

“There is only one fact on a company balance sheet and that is Cash. The rest is all subject to judgement”

So what steps can you as a business owner take to ensure that your business does not fall victim to the potentially disastrous consequences of poor cashflow?

  1. Run your business in realtime – check your business bank account on a daily basis. Don’t leave things to chance by checking cash on say a monthly or longer-term basis. Project forward expected cash out and inflows so that you can plan for any shortfalls on the horizon. Use some decent accounting software e.g. Xero, so that you have this vital information in realtime at your fingertips.
  2. Take advantage of credit terms on supplier invoices. If a supplier invoice says “Payment due within 28 days” then the earliest you should pay is on day 28. Do not pay it immediately. Better to have the cash in your bank account than in your supplier’s.
  3. Be careful of blindly accepting early payment discounts on supplier invoices. Some suppliers will offer a small discount if you settle the invoice before the due date which can be tempting at first, however, you must be clear on the levels of cash you have in the bank or worse, if you are in an overdraft position, how much it will cost you in interest payable compared to the potentially small supplier cost saving. You really must crunch the numbers and, if in doubt, don’t pay it early – hold on to your cash as long as possible.
  4. Don’t wait until month end before you send out your invoice. It amazes me how often businesses wait until the end of the month before they sit down to tot up who owes them money and how much. Remember, your customers (if well advised) will also be observing points 1 and 2 above so it could be as long as two months before you receive any cash for the work you’ve done. Crazy! The sooner you raise an invoice, the sooner you’ll get paid. Period.
  5. Ensure you have access to an overdraft facility with your bank – even if you don’t currently need it. When times are good and your bank balance is building healthily, it is tempting to avoid thinking about potentially darker and more lean times ahead. However, this is exactly the time that you should be approaching your bank to agree that overdraft facility – and not when your back’s against the wall and the cash is drying up.
  6. Think twice before extracting (too much) cash from your business at the year end. It is often preferable to work with your accountant to manage your remuneration strategy to retain some cash in the business to a certain level e.g. by way of loan to the business, whilst at the same time optimising your business and personal tax position. This way you have the best of both worlds.
  7. Try to operate a “No surprises” policy when it comes to late payment to your suppliers or creditors – this includes HM Revenue & Customs. Allowing owed balances to build up with little prospect of payment in the near future (and leaving your creditors blissfully unaware) is storing up trouble. A little advance strategic thinking is advisable as to whom you approach e.g. better (although not ideal) to upset your non-core suppliers first, unless you have a good long-term relationship and understanding with them. Speak to your accountant first.
  8. Approach your best customers for prompt payment if things are looking at a bit tight. Hopefully they will be supportive and understanding particularly if you have built up a good relationship with them (see point 7). You could incentivise them with a small discount or special offer.
  9. Don’t let old stock or services build up and gather dust. Turn them into cash as soon as you can even if you recover a tiny sliver of the original selling price. If you are concerned about potentially tarnishing your brand with cheaper lines then consider an online offshoot venture with a different name (or ebay account?). This is what the Big Players are busy doing.
  10. Trim your expenses. You can always shop around for the best deals on overheads and other business costs. Review all suppliers’ costs at least annually. You can of course outsource this process given that you have a business to run!

Effective management of your business cash-flow is essential to its long term survival. By carefully integrating the above 10 steps within your business strategy, you should find yourself in a much stronger position to weather any storms that may lie ahead.

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