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The SME Finance Monitor, a quarterly survey of 5,000 smaller businesses, reveals that 64% of businesses have not used external debt in the last five years.
Many businesspeople must wonder how they can manage without borrowing. The answer is likely to be due to good cashflow management.
Why is cashflow important?
Firstly, why is cashflow important? Isn’t profitability more important? Well, there is an old maxim that no business ever collapsed because of lack of profitability but many have gone under because they lacked cash. Having cash allows a business to operate.
Managing your cash resources and making sure you have enough to meet your needs, (e.g. paying wages, buying supplies and meeting your personal financial requirements), is absolutely critical.
Starting up: Things soon get complicated
Most businesses start with a small amount of cash from the proprietor. As they build up the business they leave sufficient funds to cover the bills. Problems often start when they offer credit to customers or buy on credit, or they take on an employee or sub-contractor who requires regular payment. Suddenly cashflow, payment from customers and payment of supplies bought on credit, becomes an issue.
Get a grip: Keep up-to-date records
It’s at this point that business people need to establish good habits. These start by making sure that the business accurately and regularly records details of trading transactions. This might be in a manual cashbook, on a computer using a spreadsheet or accounting software.
The accounting records should allow the business to instantly find out the business bank balance as well as what monies are owed from customers and the amounts unpaid to suppliers.
How to prepare a cashflow forecast
Whatever system is used, it should provide the basis for preparation of a cashflow forecast. You start with what bills are already owed or owing, and known commitments of weekly or monthly expenses, such as payroll, rent and leasing or hire purchase payments.
You then build in predictions of receipts and payments from future sales, purchases, expenses and other payments over the forecast period.
Cashflow forecasts are a key tool in the management toolkit. They can highlight when the business might run low on cash and can be the basis for an action plan to remedy the situation before it happens.
Managing cashflow
Receipts from customers
There are some vital steps that all businesses should take to maximise receipts from customers:
For big value sales on credit, check the customer’s credit rating
Agree the terms of payment with the customer before starting work
Invoice as soon as the goods have reached the customer, or service rendered
Regularly progress payment with the customer, starting after a few days
If payment is not received within the agreed period, progress payment higher up the customer’s management and consider how quickly you stop supplies or services
If still unpaid, use solicitors’ letters and threaten court proceedings (although would you be throwing good money after bad?)
Payments to suppliers
Agree payments terns with suppliers at the start of trading with them and always try to stick to them
If you think it may not be possible to pay, contact the suppliers concerned and ask to delay payment.
Provided you consistently pay on time, and requests to defer payment are rare, they will probably agree
Letting suppliers down will reflect in your credit rating which may come back to affect future supplies.
Managing cashflow is in part a mirror image of the business’ investment in working capital.
Generally, the higher the value of stock or work-in-progress, or monies owed by debtors, the greater the difficulty in keeping control of cashflow.
So maintaining a tight grip on stocks and debtors should free up cash for use elsewhere in the business.
Seven tips for managing cashflow
1. Know your current cash situation
You should always know how much cash the business has to draw upon and what the position will be over the next three months.
2. Regularly prepare and update cashflow forecasts
You must be able to predict the effect of a lost sale or a bad debt on the cash position. Regular updates of cash flow forecasts are vital.
3. Raise awareness about cash
Make it clear to colleagues how important it is knowing when customers are expected to pay, and go through aged debtor schedules to ensure delinquent customers are chased up. Assign actions to staff and check they happen.
4. Think about your credit rating
Paying suppliers when agreed can help improve your credit rating. Preparing monthly management accounts and sharing the information with your bank or the credit reference agencies might also help your credit scor
5. Consider factoring or invoice discounting
Factoring or invoice discounting can offer financing of up to 90% of the value of a sales invoice. This is likely to be much more than a bank will allow on an overdraft secured on your sales invoices. Invoice finance requires a disciplined approach to credit checking and only business-to-business invoices can be covered.
6. A bank loan or overdraft
If you decide on a bank loan or overdraft, you may be asked for personal guarantees or asked for security. Be aware of the interest rate and charges to be paid as well as any covenants with the finance.
7. Capital expenditure
If the new asset is essential to the business, think about deferring payment by hire purchase, leasing, or hiring. Also consider the tax perspective. If you have been making losses, leasing or hiring might be preferable.
If you need help with your business plan, or simply want to talk over the financial information and forecasts, a free initial discussion with an ICAEW Business Advice Service (BAS) firm is a good place to start.
Click here to read original article 'An entrepreneur's essential guide to keeping the cash flowing'
