Cashflow is defined as “The total amount of money being transferred into and out of a business”, it is much more about the amount of cash your business has at that moment in time than metrics like profit. Cashflow can cause big problems for small businesses, particularly for seasonal businesses. That painful time between invoicing and payment is felt by most small businesses but if you pay attention to your business’ cashflow this pain can be minimized.
The first step in good cashflow management is to set cashflow targets. By preparing and maintaining a cashflow forecast that you update regularly (cashflow is an ever-changing situation) you are able to get an idea of the financial outlook of your business for the next six months or so. This cashflow forecast will demonstrate to your credit controllers that you are giving this area attention and create the opportunity to assign cashflow responsibilities out to appropriate people within your team.
Once you have your cashflow forecast in the bag, the next thing to think about is establishing agreed payment terms. Once you know payment terms it will be so much easier to know when payments are going to be overdue and manage your cashflow situation.
Your business will have control over certain factors which affect cashflow. One such factor is invoicing. Your business will have the power to control when invoices get sent out. It is best practice that you send out client invoices as soon as possible after the work is finished. If you wait a week or so until after the work is finished the money will probably not be in your bank account until about three weeks after it has been completed. If you issue the invoice by email this process will take much less time and there will be an easily accessible record of the invoice.
Another factor which your business may have some control over is customer payments. The customer payment process should be made as easy as possible. Offering your customers ways of paying that are more timely and suitable to your business like paying online and deterring customers from paying by check is a good way to ensure a good cashflow.
In some instances you may be able to make direct debits the norm for your business. Establishing direct debits will allow your business to scale without an increase in the cost of collection.
If your business can afford to do so, than it is really time and energy saving to be able to use technology to manage your cashflow. There are almost endless ways that your business could use technology to help manage your cashflow. Something like cloud accounting software can save people working within your business time and help you keep track of your finances. Budgeting software is another great way for small businesses to stay on top of cashflow.
Ultimately the best way to stay on top of cashflow is to pay it the attention that it deserves. Many businesses have gone under not for profit issues but for cashflow issues and this is where your focus should be: on cashflow and not profit. Of course don’t ignore your profit but if your cashflow is OK then your profit will most likely follow in the same pattern.