Nothing is as important to the financial health of a growing small business as the constant, predictable flow of cash, because if the cash dries up, the business will die.
Cash is to a business what oxygen is to a body – it simply cannot survive without it, even briefly.
The one plan that every entrepreneur must have to ensure survival is a cash-flow budget, and you must stick to it as if your life depended on it. The following tips should make sure that enough cash keeps flowing through your business.
1. Underestimate your sales and overestimate your expenses
Unfortunately entrepreneurs, being optimistic by nature, tend to do the opposite. Great sales are predicted and expenses ignored, with the result that the cash flow budget starts off from the wrong base. If you are working on the cash-flow budget of an existing venture, base your predictions on the historical figures, and be conservative with any sales increases. Remember to take seasonality into account. With a new venture, use only the most likely, tangible sales that you will be able to make, not some abstract market-share calculation.
2. Be frugal
Cut out all nice-to-haves from your overheads as well as any capital acquisitions. Check your expenses regularly. Overheads have a sneaky way of constantly creeping up, and they need to be checked and queried regularly. Be careful, though, not to cut too deeply, especially when it comes to marketing expenses, which often seem like luxuries but can actually be an indispensable investment for future sales.
3. Avoid unnecessary debt
It is actually easier to find finance for your business than is generally thought, especially if you broaden your sources to family and friends. The real hard part of business finance is paying it back, rather than finding it. Use debt only as part of a carefully managed financial plan. Try to match the term of the debt to the lifespan of the asset that you’re buying.
4. Have a strong credit policy
Very few businesses can afford a client going bankrupt with a large outstanding invoice. It is important to have some form of credit vetting – don’t simply offer the same terms to every client that comes along.
5. When you do sell on credit, be absolutely clear about the credit terms and hold your debtors to them
Many entrepreneurs, who are often involved on the sales side of the business, feel uncomfortable getting involved in chasing up overdue invoices, to the extent that they even accept short and late payments. There is a fear that informing a client that you need the money will send a message that your business is in trouble, or weak, and that this perception may complicate future negotiations. The answer lies in clear credit terms, and insisting from the start that all your clients stick to them. A friendly but firm staff member can be tasked to chase up the invoices.
6. Keep your invoices timely and accurate
Many debtors will use the least excuse to delay payment. Don’t give them one by letting mistakes creep into your invoices. Make sure the information in the invoice is clear and include your debtor’s VAT number and your banking details so that it becomes easy for your client to pay you.
7. Work on your creditors
If your growing business gets paid after it has to pay its creditors, it will remain painfully cash hungry. Your aim must be to negotiate longer terms with your creditors than you have with your debtors. Avoid making yourself guilty of the same delaying tactics that some of your debtors will try on you. The key to good creditor terms is trust built up over years of prompt payments and good communication.
8. Free up the cash in your unsold stock
Putting slow moving stock on sale not only returns cash to your business, but gives you an opportunity to create some excitement and draw in new customers.
9. Liquidate your white elephants
Selling unused assets cluttering up your work space can give your business a welcome cash-flow boost.
10. Don’t do the ostrich trick
When you experience a cash crunch, the worst thing you can do is to stick your head in the sand and believe that your creditors can’t see you. Yet this is what many entrepreneurs do – they avoid taking phone calls from creditors, they jump to new suppliers and postpone making contact until they are able to settle the bill in full,
The right approach is to be open and upfront about your situation. Small, incremental payments show your creditors that you are still around and in business. Even if your account is overdue, negotiate cash purchases with the same supplier rather than jumping to a new one.
When cash dries up in your business, production falters, clients are let down and you lose business fast. But there is also the immense emotional strain on the entrepreneur that needs to be taken into account. It spills over into the workplace morale and can lead to bad, panicky decision making. As always, a sober plan to get out of the crisis might save your business. But by far the best option is never to get into a cash-flow crisis in the first place.