Neglecting a business’s cash flow can spell disaster. According to ASIC’s 2015 insolvency report, cash flow problems were the most common cause of business failure in 2014-15. Here are eight ways to avoid cash flow issues from ruining a business.
1. Keeping on top of the books. It can be tempting to neglect bookkeeping when running a busy business. However, as dull as this may be, keeping the books in order provides vital information about the business’s financial position and helps track unpaid invoices.
2. Make it easy to get paid – faster. Businesses should help customers pay easily and on time by sending invoices as soon as possible and offering multiple payment options, including credit card and cash on delivery. Providing discounts for on-time payment or adding late fees to overdue invoices can also help with positive cash flow.
3. Avoid bad debts. Customers who don’t pay their invoices can cause serious cash flow problems for a business. To control bad debts, implement a collection plan for overdue invoices. This can be as simple as sending reminders when invoices are overdue right up to engaging a debt recovery firm if the problem becomes serious. Performing a credit check on new customers can also help to minimise future bad debts.
4. Ensure credit terms match. Improve cash flow by negotiating matching credit terms with customers and suppliers. For example, if the majority of suppliers require payment within 14 days, provide the same terms to customers. This will help to minimise the risk of running out of cash while waiting for invoices to be paid. If such a problem arises, it may be possible for businesses to address the issue by accessing short term business loans.
5. Manage stock levels. Tying up cash in unused stock or frequently failing to order new stock when running low and consequently missing out on sales can create serious cash flow issues. Implement a system to manage stock levels to keep cash flow positive.
6. Make a profit. It may seem obvious that a successful business must make a profit, but it can be easy to operate using cash reserves while waiting for things to turn around. However, there is a risk that if this continues for too long, the cash will eventually run out and the business will fail. If a business is running on reserves, make it a priority to address the lack of profitability by either raising prices, increasing sales or reducing outgoings.
7. Foresee problems by forecasting cash flow. Forecasting cash flow allows business owners to foresee future problems. For instance, there may be seasonal periods of low sales or times when a large number of bills are due. By being aware of these issues ahead of time, business owners can plan ahead and avoid possible cash flow issues.
8. Control growth. While it is great to have a growing business, uncontrolled growth can lead to business failure. For instance, a business may win a large contract but does not have the cash available to employ additional staff or purchase additional inventory to complete the project. This could result in the business losing the contract, and its reputation. To avoid such a situation, a business owner may choose to use caveat finance. This provides the business with fast access to short-term finance secured against real estate.
By looking after the books, and ensuring that invoices are paid quickly and costs are properly managed, a business can maintain a strong cash flow that allows it to succeed.