Cash flow is critical to a business’s success. Unless you have cash flowing freely through the business, things will soon go badly wrong if an unexpected expense arises or you need to purchase some extra stock at short notice. The problem is that many business owners place greater emphasis on building their brand to attract new clients.
To be a successful business owner, you need to maintain a tight grip on your business finances. It doesn’t matter how charismatic you are or how amazing your products are, if you don’t stay in control of the finances, the business is likely to blow up in your face sooner rather than later.
Many otherwise successful businesses go bust because cash flow dries up. A big client fails to pay or the business expands too quickly and can’t maintain momentum, which leads to liquidity problems. It’s a common story, and the main reason why nine out of ten small businesses fail in the first year.
Maintain an Emergency Cash Reserve
Every business should have an emergency cash reserve to cover unexpected expenses. This is especially important for startups, so don’t be in a huge rush to spend your startup capital. Instead, keep a reserve fund set aside for unexpected expenses you might not have anticipated when you drew up your business plan.
Reduce Unnecessary Expenditure
Unnecessary expenditure is like having a hole in your bucket. You keep filling the bucket up, but it doesn’t stay full for long. The more holes you have, the faster the water disappears. Think of the holes as unnecessary expenditure and water as your cash. Reduce unnecessary expenditure and you increase the amount of cash flowing through the business.
Study your expenditure closely. Can you negotiate better deals with suppliers? Are you paying too much for your utilities? Is it worth moving to cheaper premises? There are many ways to save money, so don’t spend more than you need to.
Negotiate Extended Accounts Payable
Most established businesses hold accounts with their suppliers. Terms payable can be anything from 30 days to 90 days and beyond. If you are asked for an early payment, make sure you are given an early payment discount.
Startups have no financial history, so you might be expected to pay up front for goods. There isn’t a lot you can do about this, but try to settle your accounts promptly and once you have the option, negotiate better terms.
Never pay your bills late if at all possible. Once you get a reputation for not paying your suppliers, it hurts your credit rating and you will no longer be able to negotiate favorable terms. You will also be hit with late payment fees, which is a waste of money and not great for your cash flow.
Minimize Long-Term Accounts Receivable
Set up a tight credit control system. Make sure you know who owes what and how long the debt has been outstanding. Once a customer’s invoice is overdue for payment, send them a polite reminder. Don’t waste time waiting for customers to pay – chase them up and take steps to retrieve the money if it becomes a troublesome debt.
If you are dealing with larger companies, it’s not unusual for them to make smaller suppliers wait for their money. This will harm your cash flow and could potentially sink your business. After all, landing a large contract is all well and good, but if the client takes a year to pay after you have invested in stock, equipment, and paid the wages for 12 months, you are seriously out of pocket.
Invoice factoring could help if you have several overdue accounts in your sales ledger. This releases the cash from overdue accounts, which in turn helps your business to continue operating on a day-to-day basis.
Pay Reasonable Salaries
In the early days, every cent you make will be ploughed back into the business, but as time goes on you will want to start drawing a wage and enjoying the fruits of your labor. However, be careful not to pay more than the business can afford. It’s far better to pay a nominal salary to directors and then top up their income with dividends when profits allow. It’s OK to pay six figure salaries when the business is well established and turning over millions, but until then, err on the side of caution.
Staying in control of the finances is no guarantee your business will be a success, but it sure helps.