Managing cash flow can be a major challenge in running a small business. Even the most experienced and savvy owner can have moments when cash is stretched tight through no fault of their own.
It’s important to understand cash flow and its critical role. It’s a catch-all term for money flowing in and out of your business. Think of it as the cold hard cash you need to pay bills, suppliers and staff. Don’t confuse it with revenue or sales, which don’t materialise as cash until the money is in the bank.
When you find yourself squeezed between a demand to pay bills and a temporary dip in money coming in from clients, how you respond can make or break your business. It’s wise to seek professional advice to steer you on a better path.
There are short and long term strategies that you can apply to deal with cash flow and there are lenders who understand the challenges of both.
Loan products can be geared to manage cash flow to cover issues such as seasonal fluctuations, finding funds to buy stock urgently, paying suppliers, covering BAS statements and, of course, paying staff.
Recognising that you’re likely to face a cash flow squeeze ahead of time is a critical skill. So, below, I’ve outlined the most common problems that kill cash flow.
Rapid growth – Businesses that become successful quickly can find themselves in a cash crunch. They face demand for their goods and must spend now to make the products available. This is where a great broker will help find the right line of credit to handle this pressure.
Call the shots – Set out your payment terms. Do not let clients, especially in the B2B space, make you wait 90 days if your terms are 30 days. Strictly police your payment terms.
Late payments – Clients who don’t pay on time can kill your business. You’ve got to keep on top of your invoices. Always send them promptly and consider late fees for late payers.
Partial payments – These are often negotiated by clients who either can’t pay or are dealing with their own issues. This compromise only serves to increase the pressure on you.
No reserves – A good business has a cash reserve for the lean times. If that’s not possible, you’ll need to organise a line of credit to avoid scrambling around for funds.
Payment delays – Banks can take 48 hours to transfer funds to you. If you owe others, this can have a critical impact. Unfortunately, you can’t control a bank’s practices, so make sure you don’t get into such a situation that this becomes a deal breaker.
Bad books – Too many owners don’t keep on top of their cash flow situation. Work with your accountant and bookkeeper to understand how your cash flow is monitored, reported and forecast in your accounts.
This article is provided for general information only and does not take into account the specific needs, objectives or circumstances of the reader. Before acting on any information, you should consider whether it is appropriate for your personal circumstances, carry out your own research and seek professional advice.