This is a great article found on the newbusiness.co.uk site that I felt I had to share. Go and check it out online:
…or carry on reading:
A recent ICAEW survey revealed that 58% of micro businesses (less than 10 employees) and 35% of small and medium businesses (between 10 and 250 employees) had no debt.
Good cashflow management is key
A recent ICAEW survey revealed that 58% of micro businesses (less than 10 employees) and 35% of small and medium businesses (between 10 and 250 employees) had no debt. Many businesspeople must wonder how they can manage without borrowing. The answer is largely to do with good cash flow management.
Why is cashflow important?
Having cash allows a business to operate. So managing your cash resources and making sure you have enough to meet your needs, e.g. paying wages, buying supplies, meeting your personal financial requirements, is absolutely critical.
Starting up – things soon get complicated
Most businesses start with a small amount of cash from the proprietor. As they build up the business they leave sufficient funds in the business to cover the bills. Problems often start when they offer credit to customers or buy on credit. Or they take on an employee or a sub-contractor who requires regular payment. Suddenly cashflow – payment from customers and payment of supplies bought on credit – becomes an issue.
Get a grip – keep accurate, up-to-date records
New businesses need to establish some good habits. These start by making sure that the business accurately and regularly records details of trading transactions. This might be in a manual cashbook, on a computer using a spreadsheet or accounting software or using a simple ‘paid’ / ‘unpaid’ system for bills. Accounting records must allow the business to instantly find out what monies are owed from customers and the amounts unpaid to suppliers.
Preparing a cashflow forecast.
But running a business requires more. A cashflow forecast is essential to be confident about the business being able to meet its commitments. The forecast will detail when receipts are expected and payments are required .Forecast receipts and payments are usually analysed into months but can be weekly or even daily if the cash position is tight.
You start with what bills are already owed or owing and known commitments such as the weekly or monthly expenses such as payroll, rent and leasing or hire purchase payments. You then build in predictions of receipts and payments from future sales and purchases over the forecast period – usually up to a year ahead, although a bank will require longer if you are seeking a loan or overdraft.
Cashflow forecasts should be a key tool in the management toolkit. They can highlight when the business might run low on cash and can be the basis for an action plan to remedy the situation before it happens.
Receipts from Customers -vital steps to maximise receipts:
For big value sales on credit, check the customer’s credit rating. Agree the terms of payment with the customer before starting work. Invoice as soon as the goods have reached the customer or service rendered. Regularly progress payment with the customer starting a few days after invoicing.. If payment is not received within the agreed period, progress payment higher up the customers management and consider how quickly you stop supplies or services. If still unpaid, use solicitors’ letters and threaten court proceedings. If still not paid, consider whether to go to court, or are you throwing good money after bad?
Payments to Suppliers
Agree payments terns with suppliers at the start of trading with them and always try to stick to themIf you think it may not be possible to pay, contact the suppliers concerned and ask for more time. Provided you consistently pay on time, and requests to defer payment are rare, they will probably agree, to delay payment. Letting suppliers down will reflect in your credit rating which may come back to affect future supplies.
Working Capital Control
Managing cashflow is in part a mirror image of the businesses investment in working capital. Generally, the higher the value of stock or work-in-progress, or monies owed by debtors the greater the difficulty in keeping control of cashflow. So maintaining a tight grip on stocks and debtors should free up cash for use elsewhere in the business.
Decisions to invest in capital equipment such as computers, equipment or motor cars should be scrutinised carefully. The acid test is can the money be more profitably used elsewhere?
If the new asset is essential to the business, think about deferring payment by hire purchase, leasing, or hiring. Also consider the tax perspective. If you have been making losses, leasing or hiring might be preferably.
- A business should have a continuous focus on cash flow
- Good practices and clear lines of responsibility are important.
- Have clear payment terms with customers and suppliers
- Have a system for following up late receipts from customers
- Knowing your current bank balance and how you expect it to change over next 3 months is vital
- Good financial management not only helps manage cash it will reassure finance providers if you are seeking finance.
- A growing business can mean increased working capital. Arrange your finances to meet any increased need.
You may also find this video useful: