Cash flow is the very life blood of a business. Even if you’re managing to turn a profit poor cash flow can scupper your company before you know it. And it’s the issue of cash flow that keeps many business owners up at night.
Any business that is losing money hand over fist will find the cash pot empty, no matter what efforts are made. The real problem is those companies that are financially sound but suffer from cash flow problems. Fortunately, in most cases these businesses can be saved.
Back To Basics
It has to start right at the beginning. Too many people plunge in both feet first without a solid business model in place. If your basic model shows that the business should be profitable then you’re in a more secure place to address any cash flow issues you encounter. If your business plan wasn’t sound then it can be much harder, if not impossible, to salvage things.
Understand If Your Business Has Positive Or Negative Cash Flow
You would be surprised at the amount of business owners who don’t understand if their business is inherently cash flow positive or negative.
Here’s an example of a business that has positive flow. A take away. Here the payment for the goods are received instantly in the form of cash. The business owner then has a week to pay staff and a month to pay their rent, business rates and of course all the food items! Payment terms with suppliers are usually agreed in advance and so the owner of the business has cash coming in to meet his outgoings.
For negative cash flow let’s take another similar small business: a cleaning contractor working in the office sector. On completion of each job the company submits an invoice, expected to be paid within 30 days. The majority of expenses are wages for cleaners which, for argument’s sake, the company pays weekly. If several clients are late paying invoices the squeeze on cash flow needed to pay wages and cover other operating costs can be quick and possibly lethal.
If numbers and accounts aren’t your thing then be sure to employ the services of a good accountant or bookkeeper. They really are worth their weight in gold when it comes to the smooth running of a business.
Have Plans To Bridge The Cash Flow Gap
But what could the cleaning contractor do to make things better? Well for starters it would be more sound to pay employees monthly, to keep the outgoings more in-line with incoming revenue. They could also negotiate shorter payment terms of the invoice, say within 7 or 14 days, and include an incentive for this in terms of a discount for prompt payment.
Another aspect is to always have time set aside to chase debtors. For some business owners this may mean taking a couple of hours a week to make some firm phone calls and emails or having a member of staff who carries out this function. If that isn’t practical then it may be necessary to employ the services of a bookkeeper to do this for you.
If cash flow is still a problem then to save your business it may be necessary to consult with a firm of business accountants who can handle the issue for you. Money well spent if it keeps cash flow healthy.
If you’re concerned about cash flow in your business, or any other aspect of your company’s financial situation then HW Fisher’s team of expert accountants are here to help.