Maintaining smooth cash flow in any small business requires juggling nearly every aspect of the enterprise, from staying on top of accounts receivable, to extending the lines of credit and delicately managing the inventory. Cash flow problems can arise seemingly from out of nowhere. Therefore successful cash flow management is the fine balance of regulating the money flowing in and out of your business. Increasing your cash flow reduces the amount of fixed capital that you need to support the given level of your business. An increased, consistent cash flow also creates a predictable business pattern, making it easier to plan and budget for future growth, so avoiding cash flow problems.
There are many simple things you can do to streamline your business and avoid unnecessary cash flow problems. These include organising your billing schedule, streching out your ‘payables’ and taking advantage of early payment incentives. You could also pay close attention to balancing your client data base, checking your pricing and exploring suppliers, rather than buying all in one place. Indeed to avoid cash flow problems you could explore forming a buying cooperative. Another way of saving money and therefore solving cash flow problems is simply to renegotiate your insurance and supplier policies, tighten your inventory and in the cases of machinery, tools and premises – consider leasing instead of buying.
By organising your billing schedule you can release more capital to grow your business. To achieve this put yourself on a billing schedule with an accounting software program. Software programs can automatically classify the age of accounts receivable This kind of automated flagging system allows you to act immediately on overdue accounts. Thereby ensuring your clients pay on time so you are not prevented from making further investments and risking cash flow problems.
However, on the opposite side of the coin is stretching out your payables. Why not take the maximum amount of time allotted (often 60 or 90 days) to pay your suppliers? Think of these terms as an interest-free line of credit from your supplier. It gives you sufficient time to collect receivables without spending money on short term credit lines. However sometimes there is an incentive to pay your bill to suppliers early and thereby receive a discount.
You have heard the expression don’t put all your eggs in one basket, right? Well the same applies to your business. Check your pricing is in line with the rising costs related to inflation to avoid cash flow problems. Aso don’t buy your supplies all in one place – it pays to shop around. That’s why ensuring you are getting the best insurance and utilities by price comparing could potentially save you from cash flow problems. Streamline your inventory too in line with your production and you will reap dividends. Parts sitting around on shelves are wasted money.
Finally, leasing generally costs more than buying, but these costs often can be justified by the cash flow benefits. Lease payments are also considered a business expense, so the tax benefits are maintained even though the items are not purchased.
Mark Jefferson is a seasoned commercial finance professional with over 25 years’ experience in financial services, much of that spent providing funding to SMEs. Mark has worked with many other firms in a similar situation to yours. Call Mark on 0800 157 7355 and you can also follow him on Google+
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