1. Know your business’ balance sheet thoroughly.
This may sound obvious, but, as your accountant can confirm, many business people don’t know how cashflow works and its significance to keeping their operation afloat. Many owners focus on their business’ profit and loss statement alone. It’s a potentially fatal mistake because healthy profits can mask an impending cashflow crisis. Profit and loss statements don’t usually contain the information required to make an adequate cashflow projection. For that, you’re going to need a structured balance sheet that includes all the influencing factors including debts, interest payments, inventory and so on. This is the basis for your cashflow projection which represents an “educated guess” at the likely incomings and outgoings over the period of time you have selected to map out.
2. Set up a cashflow budget.
Get daily business news.
The latest stories, funding information, and expert advice. Free to sign up.
You need to focus on forward planning to generate a “best guess” about likely future sales and expenses. There are some cashflow software tools around, but you can also set up your own program in Excel. If you’re not familiar and skilled with Excel software, ask your accountant for help to set it up properly initially. They can also help you select suitable cashflow software.
3. Review and update cashflow budgets regularly.
It’s your best insurance against potential cash shortages. If your business has a predictable cashflow, then cashflow budgeting on a quarterly basis is often enough. If you’re already visiting your accountant for other tax related matters, then you can get a cashflow budget prepared at the same time. The rule of thumb is that the greater the cashflow uncertainty a business faces, the more often a new cashflow budget should be prepared.
If cash is really tight, you might need to move to weekly projections, and decide which invoices you’ll pay and whom you need to get payment from as soon as possible. Watch bank balances and make sure you don’t have cheques sitting on a desk waiting to be deposited. This can be time consuming, but you won’t be the first business that has had to do that from time to time.
Rapid growth sounds good but, ironically, too much of this good thing can bring on a cash crunch – which takes many business owners by surprise. A sudden spurt in sales is often accompanied by a run down in stock in-hand and debtors not being tracked or followed up when they go overdue. Strong sales one month often means a cash shortage next month. By monitoring the business’ cash status you can arrange credit from suppliers and banks to cover the temporary shortfalls. However, these arrangements take time to set up so you need to be prepared in advance.
4. Set your credit terms carefully.
If the nature of your business requires offering credit, then it is important to set clear limits to your terms of credit.
5. Get payments in quickly.
Master the art of debtor management. Let debtors know how much time remains before due dates. Stay in close touch with major debtors as payment deadlines approach. Offer small discounts for early payment as an incentive.
6. Pay your creditors strategically.
Take advantage of credit terms and prioritise payments according to the consequences involved in going overdue. Wages, taxes and direct debits are at the top of the list for on-time payment; key suppliers may be prepared to wait awhile to keep your business. Don’t pay early just to get a discounted price unless getting the discount is better than being without the cash.
7. Plan for the lumps.
Be aware of when lean cashflow patches are coming up and plan accordingly. Avoid funding major purchases from your business’ working capital unless you are sure you have the cash to cover it.
8. Get finance products working to your benefit.
Overdrafts, premium funding, lease facilities and cashflow funding products can all be excellent tools to help match a business’ cash supply with planned outlays. Even the business credit card can be a good way to ease the squeeze as long as you are sure the debt can be paid before interest kicks in.
9. Don’t incur tax and other statutory penalties.
Save yourself the money and the stress!
10. Keep your hands out of the till.
Make cash drawings for personal purposes according to conservative cashflow forecasts.
Michael McKerlie’s background is in business and IT consulting. He has been heavily involved in the development and delivery of RAN ONE‘s world class solutions and training programs, as well as undertaking consulting assignments and directing the RAN ONE machine. As a speaker Michael has delivered presentations, training and speeches to over 20,000 people.