When beginning any new venture, the key to success is not purely having a good idea and lots of motivation – you need to get a grip of your finances very quickly too. It can take a while for the money to start to flow in when you first start, so you need to make sure you know exactly how much money you are spending and how much you expect to have coming in.

You may remember a few months ago we took an in-depth look at financial forecasting, showing you how best to estimate your future income and outgoings. In this blog, we take a  look at managing cash flow itself. We will also give you a few tips on best practice.

What is cash flow?

In simple terms, ‘cash flow’ refers to the money coming into the business from selling a product or service, and the money going out of the business as result of expenses and bills. Managing the two carefully is very important to stay in business.

Why is it important I manage cash flow?

Not having enough money in the bank to cover the outgoings such as staff and production costs can have a significant impact on the smooth running of your business. Staff are likely to “down tools” if a payday is missed and legal action can quickly follow if bills go unpaid. When cash in the bank is tight, timing plays a big part, you need to ensure that you receive money from your customers in time to meet the deadlines you have to pay bills.

Unfortunately, this is not completely in your hands. You are at the mercy of your customers. If they don’t pay you on time, it can have a knock-on effect on the rest of your business by causing you to miss your own payments. If you got paid immediately and could forecast all your expenses then there wouldn’t be a problem, but unfortunately, it doesn’t work that way.

How can I ensure customers pay quickly and in full?

While there is, unfortunately, no fool-proof method for ensuring your customers pay when they are supposed to, there are a few things you can do to help the process along:

  • Credit check all new customers not paying upfront.

You can then decide whether or not they are likely to pay for the products or services you provide, thus managing the risk.

  • Make sure you invoice clients promptly.

If you take an age to give your customer their invoice, it only adds extra unnecessary delays to a payment and gives them the impression that they can take their time, too.

  • Incentivise customers to pay their bills quickly.

You could offer them small discounts or improved lead times if they agree to pay immediately or by an earlier date than usually stated.

  • Provide regular statements and communicate with customer’s that haven’t paid.

It is important not to allow your invoice to fall to the bottom of the pile or let your customer forget that they haven’t paid. A series of statements which summarise any outstanding invoices and contact via, email, letter and telephone can help to make sure your customer doesn’t have any opportunities to use the excuse “oh sorry it completely slipped my mind”.

  • For customers who are poor payers or may be deemed a higher credit risk, why not ask them to pay upfront or even put down a deposit when you take their order.

This means that you will receive a portion or even all of your income immediately – resulting in a greatly reduced risk of being affected by a late payment.

By implementing each of these measures from the start of any new business, you know you are doing all you can to make sure you are going to receive what you are owed quickly and efficiently.

How can I keep a hold on my outgoings?

One of the trickiest aspects of any growing business is managing how much you spend. To have a business that generates cash, you obviously need to ensure your outgoings over a period are lower than your income. Here are a few of our top tips for managing your outgoings:

  • Keep tight control over all expenditure.

Only delegate the responsibility of agreeing what the business spends where absolutely necessary. If you do have to do this, ensure tight controls are in place, which covers the amount and type of expenditure that can be agreed, without you providing the ok.

  • Don’t pay your bills before you have to.

Keeping the money in your account as long as you can could really help with the amount of money your business has available.

  • When choosing a new supplier, take payment terms into consideration.

While one supplier may be slightly cheaper, they may require you to pay up immediately, whereas a supplier which will let you pay 30, 60 or 90 days later may actually be the better option.

What should I do if I encounter cash flow problems?

You should always try and hold some contingency in the cash you have available just in case a client is late paying for whatever reason, or you encounter some unexpected expense. However, despite your best efforts, sometimes a cash shortfall is unavoidable.

If you know you are going to be unable to pay a bill, contact your supplier as soon as you think you may miss your agreed credit terms and explain when the payment will be made. This should help to keep their trust and understanding, as you are being as honest and transparent with them as possible. They will often extend payment terms to help ease your difficulties if they feel that you are doing all you can to pay up.

One way of managing such an incidence is to arrange a credit line with your bank from the start. This will let you borrow up to an agreed limit whenever you need to, and is seen by financial organisations as good planning – they are much less likely to give you funding if you need to borrow because you failed to plan effectively in the first place.

Don’t just put on a brave face.

There are a lot of reputable sources out there that are dedicated to give you advice and guidance on managing your cash flow and other financial matters, your accountant can often help and there are sources online such as gov.uk.

Published Friday January 10, 2014

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