Cash is the lifeblood of every business.
Without it, you cannot trade, buy goods, pay staff and so on. It is so often overlooked as you, as a business owner, are pulled from pillar to post on a variety of other pressing issues. Staff, sales, marketing, recruitment and so on, all take up so much time that cash is often pushed down the list of things to manage.
Another common misconception is the fact that if you are making a profit there must be cash in the bank as a result. Well, not always. Cash can be tied up in stock, debtors, work in progress and so on. Until the full sales cycle has been completed then the cash won’t be in the bank. If you are a growing company, cash is even more vital, as more of it will be needed to fund the growth.
So what can you do to improve the flow of cash into your business?
Firstly, have a look at the sticking points to see where your cash gets held up. These typically are:
- Debtor Timings. Is there a way you can reduce the amount of credit you give customers? The less credit you give, the quicker the cash comes in. Set out your terms at the start of the relationship and ensure your customers stick to them. Make sure you have adequate debt collection procedures in place and chase the laggards!
- Stock Holding. A lot of cash can be tied up in stock. Keep stock levels as low as possible and ensure there are adequate stock control procedures in place to ensure that you keep just what you need in stock at any one time.
- Supplier payment terms. Try and get extended supplier payment terms which means that you don’t have to pay your suppliers until closer to the time you get paid yourself. This leaves more cash in the business to do other things with.
- Production Efficiencies. Is there a way you can reduce the time it takes to produce your product or service for the customer? If you can, it enables you to get that sales invoice raised sooner and therefore, get paid quicker.
Other things you may want to consider:
- Set credit limits for customers and don’t let them build up too much credit. Does your system allow for alerts to be set up so that you are told when invoices are overdue or when they have exceeded their credit limit?
- Look at credit insurance but this can be expensive. You don’t have to insure all your debts and may only want to look at insuring major ones to keep the cost down.
- Make it as easy as possible for your customers to pay you. Accept payment in any way possible which includes credit cards. There is no reason not to accept cards these days as the cost can be cheaper than you think. Look at accepting direct debits through companies such as Go Cardless if your business model features monthly subscriptions or payments. The easier you make it the quicker you will get paid.
- Do a cash flow forecast. Every business should have one! This will tell you when any problem may arise in the future and give you time to manage the issue. Try and prepare one for the next 12 months but if you can’t project ahead for that amount of time, look at doing one for at least 6 months. If you are looking to increase an overdraft or take on some funding, this will be an important part of the package required by the lender. It is good practice to have one of these.
We have touched on a number of issues above, and we can certainly help you in managing your cash. There is an awful lot more that is available out there, so please feel free to give us a call to see how we can help.
For more information, hear from Steven Glicher discuss Cash is King in this short video