As a small business owner, the survival of your business is highly dependent on your cash management. Often, you’ll hear a lot of discussion around increasing profitability to build your business, but profitability means nothing if you don’t have the cash in your bank account to cover costs or pay back debts when they’re due. Poor cash management is a key business killer that’s not to be overlooked.
Cash management is also known as cash flow and describes the amount of money flowing in and out of your business
Good cash flow means there’s more money flowing in than out of your business. Bad cash flow, on the other hand, is when more money is flowing out than in. There are several common culprits for when a business is struggling with cash flow, including:
- Slow paying customers
- Higher upfront or overhead costs than expected
- Poor credit terms with suppliers
- Money being tied up in unsold stock
If you’re concerned about your cash flow, don’t panic. Taking steps to improve things today means a healthier cash flow tomorrow. Here are our top five tips to improve your cash management.
1. Develop a cash flow forecast
A cash flow forecast is a tool used to predict how much money will be flowing in and out of your business in the future. Forecasting is especially useful for new business, fast-growing businesses, or businesses with an unpredictable sales pattern. A typical cash flow forecast will estimate cash flow for the next 12 months, but it is possible to create one for a shorter period of time.
With a cash flow forecast, you’ll be able to better predict times when money will be tight in your business, and prepare for them by getting a bank loan or opening an overdraft account. A cash flow forecast can also help you make important decisions like when to hire additional staff, open a new location, or reward yourself for your hard work.
There are many free cash flow forecast templates available online, and most accounting software will have a cash flow forecast tool built in or available to download as an app. We use Syft to help make cashflow forecasts with Xero.
2. Make it easy for your customers to pay
It doesn’t matter how many sales you’re making if they aren’t converted into cash in hand. Especially if you’re seeing an increased profit line but a poor cash flow, the issue is likely in your Accounts Receivable. Help customers pay on time and improve your cash flow by:
- Sending out prompt and accurate invoices
- Accepting online payments like direct debits (we use GoCardless) or paypal or new open banking payment providers like Crezco
- Accepting deposits or instalments so customers can spread their payments out in more manageable and predictable chunks (this can be done via GoCardless)
3. Chase slow payers
Unfortunately, even when you make it as easy as possible for your customers, you may still encounter late payments. It can feel awkward to send out reminders to your customers about missed payments, especially when you have a friendly relationship with them. Luckily, there are some great tools in Xero that automatically send out payment reminders and notifications, like:
- Invoice Reminders: you can set up automatic reminders that go out using your own words and following your own timetable.
- Chaser: Xero’s leading accounts receivable app that automates reminders and allows you to view a client’s entire payment history in one place
- Satago: an all-in-one cash management app with handy tools like automated payment reminders and detailed credit risk insight
- InvoiceSherpa: An accounts receivable app that helps automate reminds, recurring payments and late fees
4. Negotiate terms with your suppliers
The amount of money you pay for supplies or stock for your business may seem like a set cost you just have to work around. In fact, there are ways you can improve your cash flow through negotiating with your suppliers. This could be by negotiating discounts for bulk purchases, having credit extended to your business, or paying your supplier upon sale of goods to reduce the amount of money you have tied up in stock.
5. Spread key costs over a year or more
Like with your cost of goods, there are ways you can improve your cash flow by spreading the cost of business overheads throughout a longer period of time rather than paying for everything upfront. If you look through your expense account, is there something you can split into more manageable payments? Most insurance and utilities allow you to pay by monthly direct debit. Expensive equipment can be leased rather than bought outright. Or paid for through hire purchase over a longer period of time.
By doing this, your overall expenses and net income will remain the same. You’ll have more cash in hand to help keep your business running.
Sometimes, it takes an extra set of eyes over your accounts to see where your cash management can improve. It can also help you make sense of the numbers you see in your cash flow forecast. At Fearless Financials, we have an entirely digital approach to bookkeeping and cash flow. We can set in place processes and tools so you’re paid what you’re owed quickly and on time. Then you can make informed decisions for the future of your business. Reach out to us today to learn more.