We’ve all heard the saying that ‘cash is king’, but what does this actually mean? Cash is the blood in the veins of a business and without it, a business certainly cannot grow and will struggle to survive.
Did you know that over 60% of businesses that fail are profitable but simply run out of cash? Some of you might be wondering how this is possible. And the answer is simple: through poor management and uninformed decision making.
Some specific examples of things that can cause cash flow issues in a business are:
1. Not invoicing sales or collecting debtors in a timely fashion.
2. Paying suppliers upfront.
3. Buying excessive amounts of stock. This is potentially a double whammy as it can also impact overheads such as storage costs.
4. Under-performing overheads such as staff. This includes a sales team who are not hitting KPIs or marketing that is not generating enough leads.
So how can we avoid these common pitfalls and unlock cash flow in our business? Here are 8 tips to help you manage your cash flow:
1. Plan and track
Use a 12 week rolling cash flow forecast. Set aside 45 minutes on a Monday morning to update and review the forecast, with the actual week just past and a new forecast for the week ahead. This document will become a live management document that will give you visibility over your business’ cash situation for the next 12 weeks. When you identify a potential cash flow issue in the forecast you can plan to overcome it rather than the issue hitting you when you least expect it. Also, you can use it to help you make decisions about expenditure before you commit to it – for example, you might plan to run an expensive advertising campaign at the same time you have a substantial BAS due. The cash flow forecast will tell you whether you have the cash for both and if not, you can either delay the campaign or negotiate payment terms that work for you.
2. Only order what you need in stock
Often in product based businesses, stock is over ordered which ties up cash and cripples the business’ ability to sell the stock because there is no money for activities such as marketing and sales. To overcome this, work out what your lead time is to receive stock and order enough stock to satisfy estimated sales in your lead time plus a week or two. This means you are ordering more frequently which will probably increase the cost per unit and also impacts your margins. This is not ideal but the upside is that you know your margins will increase as you sell more and you have the cash to spend on other vital areas of your business like marketing and sales.
3. Be disciplined with debtors (collect on time – no exceptions)
Make sure you have a strong invoicing process in place, you might choose to invoice at the end of the month or as you go. Either way track how much each customer owes you and on what date. Make sure your credit terms are clear on your invoice and you communicate them clearly with your customers. Finally, collect on your terms! Allowing customers to build up large balances cripples your cash flow and is a sign that your customer is potentially struggling, which could result in them not paying at all.
4. Renegotiate payment terms with suppliers
When you complete your 12 week cash flow forecast, you might find that your payment terms do not suit the profile of your business and if you could extend your payment terms slightly, your cash flow would be much better. Talk to your suppliers and renegotiate terms that suit your business better. This can be hard as a small business when your order quantity is small, however, do your research on other supplier’s terms and use this as leverage.
5. Invoice financing
As a startup or small business it can be hard winning large contracts or bringing large clients on board and sometimes to win the work we are forced into extended payment terms (60 days plus). This cripples our cash flow and it may not be possible to renegotiate, so what do we do? The answer is invoice financing. You can sell your invoices to a financier who will give you the cash upfront and they will wait for payment from your customer, however, it comes at a price. Invoice financing can cost 10-15% of the invoice so before you do this check your margins to make sure you can still make a profit.
6. Reinvest profits
As we grow our business we should not take too much cash out of the business personally. It is important in early stage business to use the profits to grow the business, so keep your drawings to a minimum.
As a startup, growth is the name of the game. The unfortunate reality of growth is that it sucks up cash, and generally speaking, the greater the growth, the more it costs. Sometimes we are staring a huge growth opportunity in the face but we can’t afford to take full advantage of it. In these situations, an investor could provide you with the cash (in exchange for equity) you need to take full advantage of the opportunity in front of you.
Financing asset purchases, taking on an overdraft or simply taking out a business loan are other ways to access needed cash for your business. A word of warning around this option: make sure you have a plan for how your business will operate with the cost of the cash (e.g. interest repayments) and include how you are going to pay the debt back.