It’s a grim truth in business that an otherwise successful enterprise – in terms of sales and strong demand for what it offers – can easily fail or at least fall into difficulties if cash flow is poor. Some estimates put cash problems as a root cause of more than 80% of businesses failing.
The cash flow problem
Cash flow problems occur when more money is flowing out of rather than into a business, leaving it short of funds to cover costs such as wages, paying suppliers and other bills.
Plenty of money may be due from sales and other income sources but, unless there are plenty of deposits hitting the business bank account at the right time problems can occur. Improving cash flow is always worth investigating.
- Overhaul payments and supplier terms
It’s worth checking you’re getting the best deals and rates from suppliers and the most advantageous payment terms.
Checking current rates against the competition is important; it’s easy for long standing arrangements with suppliers to fall behind what you could get from a competitor. Maybe your order volumes have grown since you started with a certain supplier so qualifying you for a better deal or improved credit terms?
If you can generally ‘push back’ the dates when you pay your suppliers, secure a lower rate or improved credit terms, this could keep more of your money in your account for longer, so don’t be afraid to negotiate with them.
- Consider raising prices
Of course, this will be influenced by market forces and how successful your products or services are, but even a small price rise can have a profound effect on cash flow if you can keep your overheads the same.
- Reassess payment terms
If you can’t justify a price rise – or even if you can – another factor is payment terms: how long do you allow customers to pay? If your payment lead times are more than those allowed by your suppliers this could easily affect cash flow as you’re paying out before receiving.
Shorten your payment terms but perhaps offer an incentive such as some type of discount, or maybe a freebie thrown into the order if you feel suddenly changing payment lead times may cause ill will with your customers.
- Tighten up on invoicing procedures
If you invoice your customers and then await payment ensure you’re doing all you can to invoice efficiently and at the right time.
If you’re selling business to business, you may have certain customers who process invoices received at certain time on condition they’re received by a specific date. It’s easy to miss a payment cycle by being just a day or two late submitting an invoice in the case sometimes of larger corporations processing high numbers of invoices a month.
Ensure you know when customers like this should receive their invoices so you don’t have to wait for the next payment cycle.
Otherwise, ensure your invoicing is clear and as error-free as possible; invoicing disputes can obviously hold things up and bump you to the following month for payment if unresolved in time.
- Sound cash flow forecasting
It’s far better to be prepared rather than reacting in a hurry to cash flow issues, so make sure your cash flow forecast is adjusted regularly and referred to frequently.
Plan ahead for known expenditure such as, perhaps, the acquisition of new equipment requiring a large investment that may put cash flow under pressure down the line. Is an impending office move going to incur increased costs that need to be planned for?
Use the services of an accounting professional but ensure you know how to interpret your cash flow forecast.
Cash flow – proof you’re running a sound business
As said earlier, cash flow is vital to keep the doors open; a business isn’t fully successful until it can function day to day with adequate funds. A popular product or service is key of course, but it must be backed up with sound cash flow or it will flounder.