Cash flow!


Cash is king when managing growing, new or indeed any business. The reality is that more small businesses fail as a result of cash flow problems than lack of profitability. Very often, rapidly growing businesses fail because their new customers do not pay them before payment is due to suppliers and staff.   Cash flow problems are often indicative of wider issues in the supply chain but the good news is that generally businesses do not need a complete overhaul to dramatically improve their position.  It is important to note though that rarely will one action alone solve the problem, the solution tends to lie in making small changes across the supply chain.

In simplest terms, cash flow management means delaying outlays of cash for as long as possible whilst encouraging anyone who owes you money to pay as quickly as possible. Here is my quick guide to improving your cash flow position;

1. Start to plan

Develop a simple cash flow model (if you don’t already have one) which shows what money you will receive and what you will need to pay out.  Sounds blindingly obvious but so often it is overlooked.  This will highlight any issues and allow you to plan for them.  You may be able to prevent the issue through negotiation with suppliers or customers or if you need credit, banks tend to be more receptive to planned future requirements than immediate crises. Creating a simple model like this helps you to really understand the finances of your business, particularly in assessing when you are likely to get paid, how you need to manage payments and the real impact of changes (turnover, staff etc).


2. Managing Supply

The quicker that you are able to supply goods, the quicker you will be paid and the less stock you will need (and therefore the less cash tied up in stock).  Take a look at your processes – How long does it take you to process and fulfil a customer order?  How could you reduce this?  Consider simplifying or standardising processes and removing any unnecessary steps.

Also look at your inventory (this is not just relevant for manufacturing businesses, we all carry stock of some kind…)  Do not carry more than you need and considering selling off redundant or slow moving stock.  Think about everything you stock – stationery, raw materials, work in progress, finished goods, equipment; they all tie up cash.  Once you have your stock position in order, make sure that you put processes in place that ensure that you stay in control.

Work with your suppliers, negotiate terms and try to make sure that your supply terms are at least as good as the terms you offer your customers.    Pay suppliers on time but not early and if you are struggling, talk you them.  Generally suppliers will be more understanding if you are honest with them and can commit to a payment date.

Consider using electronic funds transfer for payment, that way you can pay on the due date and the money does not leave your account before then.

If your business is complex, you may need to segment your suppliers rather than having one strategy for dealing with them all.

3. Managing Customers

The simple truth is that not all customers are good customers, we are better off without those who don’t pay us!  Ensure that you credit check all first time customers or take payment up front.

Make sure that you invoice promptly and follow up on any overdue accounts.

The ability to forecast sales will help you to plan and manage cash flow better.  How do you forecast sales?  Is it accurate?  If you have nothing in place then setting up a simple spreadsheet using historical sales and future prospects will give you a start.

Make it as easy as possible for customers to pay, such as accepting payment online or by credit card.

Consider offering term discounts for early payment (e.g. payment terms 30 days but 2% discount for payment within 10 days).

Also think of the mix of customers you have, if your business is based on a few large customers then your cash flow is very vulnerable in the event of one late payment.  Try to balance your customer portfolio with diversified activities which spread the risk across more, smaller customers.  This does not mean completely changing your business model, just adapting it to make it more able to withstand late payment.

4. Surviving short-falls

If you assume from the beginning that at some time you will need credit, you can arrange this at your bank.  This is not as easy as it once was, but it may be worth setting up an overdraft facility with your bank to help manage short-term gaps.

Keep talking to your bank and your accountant (if you have one).

Work with your closest suppliers, they may be able to afford you more time to pay.

Work with your best customers, they may be able to pay early.

Choose the bills you’ll pay carefully. Don’t just pay the smallest ones and ignore the rest. Prioritise payroll so that employees are paid first. Pay crucial suppliers next. Ask the rest if you can skip a payment or make a partial payment.

I hope that this guide has given you some useful ideas to improve your cash flow and I’d love to hear from anyone who has more tips and advice.  I work with all kinds of businesses across all of the areas above so do get in touch if you would like a chat!