Managing cash flow in your business is one of the most vital aspects of business financial control. If your business regularly runs out of cash, it can be very stressful and make it very difficult to sustainably grow a business.
How can a business improve cash flow?
Here are some tips to help you with how to maximise cash flow and overcome and preferably avoid cash flow problems:
1. Understand your current cash flow position
The best way to understand your current cash flow position is to plot it out in black and white in the form of a Cash Flow Forecast.
It can be a very simple spreadsheet that records your opening bank balance, the money coming in and going out each day, week or month… with a closing balance at the end of each period.
You may need a little more sophistication if you’ve got customers that take time to pay and suppliers that give you terms.
The important point is that you’re able to see very clearly what will be your position going forward. You can see where the ‘peaks and troughs’ will be and when you need to work on the ‘troughs’.
2. Understand the difference between profit and cash flow
One of the biggest myths about how to improve cash flow is that all you need to do is sell more stuff. What people tend to forget is that for every sale, there are costs associated and customers take time to pay. So in between you selling something and getting paid… you’ve got to pay suppliers or staff/labour for the costs associated with the sale.
Selling more can sometimes actually make cash flow problems worse, if you don’t consider this situation. The timing of calculating profit is quite different from the timing associated with cash flow. Profit is measured when the sale is made and the costs are matched against it.
Cash flow moves quite differently, because customers don’t always pay immediately when the sale is made and suppliers need to be paid often before you’re paid by customers… Hence cash flow squeeze is often caused by sales growth. Understanding your business numbers helps to avoid cash flow squeeze.
3. Figure out what impacts cash flow the most
Some of the biggest impactors of cash flow are costs, overheads and timing of income and payments. Costs and overheads can quickly eat up all the cash made from sales, so anything you can do to reduce them or find more efficient ways to get things done has a positive impact on cash flow.
I see it so often, that businesses get all ‘gung ho’ at the start and load themselves up with way too many overheads, then sales don’t quite match up to expectations and they end up struggling to pay bills.
The timing of income is important. The faster you can get paid i.e. invoicing and collecting payment ASAP, getting deposits or progress payments the better your cash flow will be. Conversely the better terms you can get from suppliers, the tax office, lenders and investors the better your cash flow will fare.
4. Work out a plan to measure and manage your cash flow
As mentioned in point 1, once you’ve got a cash flow forecast in place, it will serve you well to monitor what actually happens compared to what you envisaged. If you forecasted for a certain level of sales and collections, but that didn’t occur as planned, you should get plenty of notice that you need to change things to suit.
If you can minimise fixed overheads as much as possible and give yourself the ability to ramp costs up and down in line with income, this will help greatly. If you can organise a source of funds before you need it, this will give peace of mind when the time comes to call upon it. If you can avoid running to the bank ‘cap in hand’ at the last minute, that will greatly enhance your chances of getting the funds you require.
5. Determine ways to make cash flow a ‘non-issue’ for the future
Once you’ve worked out how to proactively manage your cash flow, it becomes a non issue.
The keys to achieving this are:
- Constantly run a Cash Flow Forecast (even when times are good). Things can turn around very quickly and you don’t want to be caught short.
- Proactively manage the factors impacting cash flow i.e. funds coming in and going out. Constantly speeding up customers payments and analysing spending and supplier terms is key to avoiding wastage.
- Put in place sources of funds when you don’t need them… not when a crisis hits. It’s much easier to present an attractive proposition to a lender/investor when times are good.
For more information about maximising cash flow and cash flow projection visit:
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