How to Improve Cash Flow in your Business
Cash flow is the lubrication that keeps a business running smoothly; it’s as simple as comparing the money ‘flowing’ into the company in relation to money ‘flowing’ out. It’s important to manage the flow so there’s enough cash to ensure your ability to pay for staff, supplies, overheads, marketing costs, administration costs and taxes. A well-managed cash flow can contribute to business growth. A neglected cash flow is one of the most common reasons a business can fail.
Managing your cash flow
A healthy cash flow starts with establishing and maintaining good habits. Accounting records must be kept consistently and accurately. Traditionally, and for smaller companies, this involves a manual paper cash book, but now a simple computer spread sheet or specific accounting software is standard practise and easily accessible.
‘Cash flow forecasts’ are used to predict cash flow by comparing expected expenses with an estimate of sales, invoice payments and other income. This estimate will likely be based on comparative figures from previous months and years in an established company, or on market research with a fledgling company.
The cash flow forecast will give you some idea of what to expect from upcoming cash flow; once this period is complete, a ‘cash flow statement’ can then be carried out to express the difference between the forecast and what actually happened. This will steadily build a picture of how the business is working in terms of cash flow and can influence the next period’s forecasting, policy adjustments or even drastic action.
Improving cash flow
If your cash flow needs a bit of a boost, evaluate both your customer and supplier terms. A significant difference between accounts payable and accounts receivable deadlines can lead to an awkward ‘float’ period (the time between paying your own bills and waiting for payment from customers). Consider reducing the credit period offered to customers and negotiating for a relaxed credit period from your suppliers to reduce the float.
Focusing on the way you collect credit can also improve your cash flow. Check the performance of customers: are they consistently paying on time? How fast are you to react to late payments? How fast are you to react to problem payments? Are you promptly identifying disputes? It’s worth looking for anything that could potentially hold up your credit.
Invoice discounting – what it is and how it can improve cash flow
‘Invoice discounting’ is a form of short-term borrowing used to improve cash flow. It can allow for quicker access to the credit your business is due, thus improving your cash flow and opening up more working capital. With each invoice, an external company will loan a large proportion of the money you are due and will then take the replacement credit once the invoice has cleared with your customer. They will then release to you the remainder of the invoice amount after deducting their own fee. Typically, this approach is reserved for companies with an annual turnover of more than $500,000.
Things to remember when growing your business using this kind of financing
Good housekeeping, regular checks and accurate projections are the core cash flow ingredients for ensuring the potential for business growth.
Aim to strike a strong balance between demanding and chasing your own invoices and building your suppliers’ confidence in your own payments.
When things don’t work to plan, build these lessons into future cash flow forecasts so there’s future contingency. In the event cash flow statements are showing an excess of cash flow, further budget can be considered for building other resources.
Gemma works for PS Finance, an independent brokerage offering cash-flow solutions such as invoice discounting and invoice factoring.PS Finance is based in Manchester, in the north west of England. For more information about the services PS Finance offers, visit http://www.psfinance.co.uk
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