Running a successful business relies heavily on proper planning and good cash management.
Cashflow is the lifeblood of any small business and effective management ensures that a business can meet its financial obligations, seize growth opportunities when they arise and weather any downturns in the market.
Whilst the principles of good cashflow management are the same regardless of the size and nature of the business, understanding the specific cashflow cycle of your business is crucial.
This involves knowing when cash comes in from sales and when it goes out to pay expenses. The cycle typically includes the stages of purchasing stock, selling goods or services, issuing invoices as appropriate and collecting monies owing.
By mapping out this cycle for your business, it is possible to identify periods of cash surplus and shortage, allowing you to take a strategic approach to your business planning.
Having a cash reserve is akin to having an emergency fund. It acts as a buffer against unexpected expenses or dips in revenue. Experts recommend having at least three to six months’ worth of operating expenses saved. This reserve can help sustain the business during tough times and prevent the need for emergency borrowing.
Efficient management of a business’ debtors (the people who owe you money) is vital. Sending invoices immediately after the service or goods are delivered ensures that customers receive them promptly, thus speeding up payment collection. Encouraging early payments by offering discounts for early settlements may also prove an effective tactic.
Establishing clear credit policies and conducting credit checks for new customers can mitigate the risk of bad debt. Using accounting software to automate invoicing and follow-ups reduces manual errors and ensures timely reminders are issued, while the use of online payment gateways and mobile payment solutions ensure faster payment processing, improving cash flow.
While it’s crucial to pay suppliers on time, you can optimise cashflow by strategically managing when the business pays its creditors (the people it owes money to). Payments should be prioritised based on due dates and negotiating longer payment terms with suppliers allows you more time to use incoming cash before it is used to settle outstanding bills. As with the collection of monies, utilising electronic payments can ensure timely payment of bills and provide better control over cash outflows.
To be effective, cashflow management needs to move beyond checking the bank balance every day.
Preparing a cashflow forecast, to sit alongside the Profit and Loss forecast, will help you to predict the future inflows and outflows of your business based on the planned sales activity. This can then be used in planning for upcoming expenses and identify potential cash shortages.
Modern technology offers tools to streamline cashflow management, with accounting software like QuickBooks, Xero and Sage providing real-time cashflow tracking and reporting. Monthly, or even weekly, cashflow reports which track “actual’ figures against those which were forecast can provide valuable insights into the financial health of the business and, with regular monitoring, help you identify trends and potential issues before they become critical. A rolling forecast, which is updated regularly, can also provide a dynamic view of the business’s financial trajectory.
As part of this ongoing financial monitoring, regularly reviewing expenses can identify areas where costs can be cut without impacting operations. Reviewing and cancelling unused or underutilised subscriptions is a good starting point. Regular negotiations with suppliers for better rates or discounts can also help reduce costs, as can implementing energy-saving practices to help lower utility bills.
Efficient stock management systems can also reduce holding costs and minimise stockouts or overstock situations.
Proper planning and good cash management is critical for the sustainability and growth of small businesses. Consistent monitoring, strategic planning and leveraging technology are the keystones to mastering cashflow management and ensuring you have the necessary funds to meet your obligations, invest in growth opportunities and maintain the financial stability of your business.
