How to Maintain Cash Flow
Small businesses need cash to survive. This may seem an obvious statement, but it also happens to be literally true. Many a profitable business has dissolved simply through running out of cash.
A classic example: a firm wins a very large order that will make its owners wealthy beyond their dreams. They hire lots of new staff, secure larger premises, and start manufacturing. Three months later, the firm owes a fortune in extra wages, rent, and parts. But, because the order is not finished, they won't be paid for it for several months. They need cash to pay their bills now, but do not have it to hand. The creditors close in and shut the business down, despite the fact that, on paper, the business appears solvent.
In any business, cash flows in, and cash flows out. One trick is to make sure that more cash is flowing in than flowing out at any one time. Working out when the money is going to come in and go out is called a 'cash flow analysis'. It sounds scarily technical, but it's actually easier than you think once you've got the hang of it. Pop down to your local NatWest branch and see one of their Business Advisers to do a cash flow analysis.
Once it is done, you will be able to see, firstly, if there is any time over the next year when you might be in danger of running out of cash, and secondly, whether your business is basically profitable or not.
If the cash flow analysis shows that there might be trouble ahead, there are a number of simple things you can do to keep cash in your business.
Leave Lending to the Banks
Late payment is a blight on small businesses. If a customer owes you money beyond the agreed terms, you are in effect providing them an interest-free loan.
- Make sure you agree credit terms before agreeing an order, and make sure the invoice indicates them clearly.
- Don't extend credit to customers without checking first that they're good for the payment. Insist on trade references, or, if the sums involved are serious, go to a reputable credit-checking agency. If there's any doubt in your mind, ask for at least part-payment upfront, for example to cover your material costs.
- Consider offering discounts for prompt payment.
- Remember that under the law, small firms are entitled to charge interest on late-paid bills (you can obtain details from any NatWest branch).
- Put someone in charge of chasing late payers, and be polite, but persistent. Make sure you chase the oldest and largest debts first.
Everything in your stockroom has been paid for, but hasn't yet earned its keep by being sold - so it represents cash that has been drained out of your business. It may concentrate your mind if you imagine that every item of stock has a £20 note wrapped around it!
- Keep stock levels low - can you arrange more frequent deliveries by your suppliers to achieve a 'just-in-time' stock level?
- Make bargain offers to get rid of old or obsolete stock lines. Better to have some money in hand right now than to wait forever for a 'proper' price.
- Use discounting to shift slow-moving stock. There's no point in discounting goods that move quickly - it's the sticky stuff that needs a helping hand.
Customers and Suppliers
Happiness is getting your customers to pay you before you have to pay your suppliers.
- See if you can win better credit terms with your customers than you offer your suppliers - but do not be tempted to pay late. It upsets people.
- When you set up deals with your customers, consider asking for some of the money in advance to pay for materials, with the balance to follow after the job is complete.
- Identify which are your most profitable customers, and concentrate on developing their business. Find out what their plans are, and see if you can mesh in with those plans to secure extra business.
- Try to spread your customer base so that there is a constant flow of cash into the business from a variety of sources.
- As for suppliers, be prepared to shop around. Even if you do not want to move suppliers because you value the service they offer, knowing what their rivals are prepared to offer you can help you negotiate keener prices and better terms from your own suppliers.
Don't pay more in bank charges than you need! Pick up a leaflet from your local NatWest branch explaining how to reduce your bank charges.
- Consider using NatWest's OnLine Banking and automated services to reduce bank charges - it can make a real difference.
- Avoid dipping into unauthorised overdraft - it is expensive. If you need a bigger overdraft, ask!
- Consider leasing equipment rather than buying it outright. It may save you considerably in tax.
- Do not occupy more space than you need. If you have empty rooms, why not let them out?
Follow these simple tips, and you've got every chance of making cash work for you rather than against you.
Also see: Cash Flow Advice for Women in Business