Managing cashflow is crucial to running a successful business
Running out of liquid capital is one of the most common reasons that small businesses fail. Monitoring your cashflow and planning accordingly is important at every stage of the business lifecycle.
The point at which many business owners trip up is in failing to realise that even a thriving and profitable business can easily run out of cash. If you believe that your cashflow might become negative, meaning that your expenses may exceed your takings over a specified period, then you should investigate opening a line of credit for your business.
You should be firm and clear with customers about when payments are due. Issue invoices immediately and have a system in place that will send out a reminder if payment has not been received by the specified date.
If you are experiencing a shortage of cash, then you should be open and honest with your creditors. There is a good chance that they will be amenable to a payment plan, so long as you discuss the issue early on.
With careful planning, businesses give themselves the best chance of staying cashflow positive. It is important to put in place a solid sales plan for the next 12 months.
The aim is to manage seasonal fluctuations, and maintain positive cash flows throughout the year. Once businesses have clearly identified their yearly peaks and lows they can create a seasonal management plan with the following considerations:
Managing seasonal demand
For businesses that have a peak period, managing inventory becomes a demanding and time-consuming task. Without careful planning, inventory can get out of line, resulting in heavy markdowns due to overstocks and serious cash flow problems.
Hours and staffing levels
Determine the need for seasonal staff. Work with staff to stagger schedules so that the business is fully operational during peak periods. This may involve more night work.
Review last year’s records
Make allowances and adjustments for unusual events, such as weather and one off promotions. Based on current market share, make profit estimations taking into account the busiest and slowest periods.
Managing cash flow is more than just good practice for business; it is key to survival. Here are five tips for improving your credit management and cash flow:
Implement a clear credit policy
Routinely review your business’s credit policy to ensure it remains appropriate for the business’s risk profile.
Document your terms of trade
Terms of trade need to be documented and include aspects like prepayments, deposits, guarantees, security and payment terms.
Understand your customers
Routinely carry out credit checks for new and existing customers to identify any issues that can influence credit terms and limits.
Develop a clear debt recovery process
A business’s process for collections should be clearly mapped out, understood and strictly followed by all staff. Businesses who are disciplined in their collections process are more likely to see this kind of behaviour in clients who will follow the same practice after seeing the importance of paying on time.
Make provisions for bad debts
Good credit management is about safeguarding profitability. Provisions for bad debts should be made in the budgeting process to minimise the risk of impacting on profitability.
For further advice or assistance with managing your cashflow, contact us today on (03) 5443 8888.