A healthy cash flow is essential to the success of your small business, and it’s important to regularly review your strengths and weaknesses in this area. One of the most important things to look at is your cash flow habits so that you can identify areas of improvement and protect the financial health of your business. Cash is the fuel that drives your business forward and so a healthy cash flow is the key to steady and sustainable growth.
1) Shoddy Bookkeeping
Be honest: how often do you really set aside time to update your records and organise receipts? Lax bookkeeping creates a number of problems when it comes to cash flow. For one thing, if you haven’t updated your books lately then you’re using outdated information to inform your action, which could negatively impact your results or lead to nasty surprises. On top of this, you need accurate financial records in order to identify and prepare for cash flow shortages ahead of time. Furthermore, you should regularly compare your progress over set periods of time to get a better understanding of how your business is doing. Finally, bad bookkeeping can result in missed tax deductions and an unnecessarily large tax bill, which then leads to a diminished cash reserve.
2) No Contingency Plan
You may not enjoy thinking about the worst case scenario for your business, but you still need to prepare for it. It’s important to regularly put money aside and build up a cash reserve that acts as a buffer. This will prove enormously helpful when unforeseen expenses occur or disaster strikes. Ideally, you should have enough to cover your costs for 3-6 months in a worst-case scenario. Furthermore, you should secure credit whilst the going is good. Arrange a business credit card to smooth over short term cash flow issues, although you shouldn’t rely on this for long-term borrowing. However, the interest free period on a credit card gives you some breathing space in case a client is a week or two late to pay you or an unforeseen expense arises. You should also arrange a line of credit. This is a preset borrowing limit, meaning that, like a credit card, you do not pay any interest until you actually use it. A line of credit typically has a lower interest rate than a business credit card, but there is no interest-free period. It is repaid in increments, like a traditional bank loan.
Needless to say, overspending is very bad news for your cash flow. It’s important to keep a close eye on your spending and track every penny - you’d be surprised how quickly costs can mount up. However, overspending may not be down to recklessness on your part. It could be that you’re paying suppliers or vendors too much when there is a better deal to be had elsewhere. This is why it’s important to benchmark your existing suppliers and shop around to see if you can save money elsewhere.
4) Generous Payment Terms
Getting paid quickly is one of the best ways to protect your cash flow. However, many businesses extend overly generous payment terms based on conditions that no longer apply. Decades ago, invoices were sent in the post and could take days to arrive. Payment was usually made by cheques which again, had to be sent back and forth and would then take days to clear. Nowadays, however, invoices are sent via email and can arrive in a matter of seconds. In fact, if you use accounting software to automate your invoicing process for recurring clients, you don’t even need to lift a finger to send an invoice. Furthermore, any issues with the invoice received can be addressed quickly and fixed almost instantly. In addition, electronic payments make it faster and easier than ever for your customers to pay you. Therefore, 30, 60 and 90 day payment terms are often overly generous and unnecessarily delay you from accessing your hard earned money.
5) Being Too Lenient A report by Intuit QuickBooks found, on average, that small and medium sized UK businesses spend over one week per year chasing late payments. This represents a huge drain on time and resources. Therefore, it may be a good idea to introduce late payment fees to recompense you for this and encourage clients to pay you on time in the future. You might also consider outsourcing credit control to an external company that has the resources and expertise to secure your payments as soon as possible.
By breaking the above bad cash flow habits and implementing positive ones instead, you can protect the financial health of your business and make sure that cash flow issues do not interfere with your growth. By staying on top of bookkeeping, getting a hold on your spending and creating a contingency plan, you can identify and prepare for any shortages that lay ahead. Meanwhile, tightening up your payment terms and being stricter about deadlines can help you to get paid faster and stop wasting time and money dealing with late payments. Together, these improvements can totally transform your cash flow situation and put you in greater control of your finances.