Late payments and inadequate cash flow liquidity are preventing growth
Cashflow liquidity is king when it comes to the financial management of growing your company. There is no guarantee of seamlessly avoiding problems if there is a lack of liquidity in any business.That’s why for small businesses, cash flow can be a more pressing issue than profit especially starting off.
The problem is the lag in time that suppliers and employees need to be paid and the time you collect from your customers, and the solution is cashflow management. Put simply, cash flow management means to delay the outlay of cash for as long as possible while at the same time encouraging anyone who owes you money to pay as quickly as possible.
Cashflow over profit
Writing for Real Business, Dr Stephen Fear says: “Certainly making a profit is essential if a business is to prosper long term, but I would argue that cash flow is the single most important thing to worry about in the initial stages of creating a new enterprise”.
“Unless you watch your cash flow, your new business may not be around long enough to show a profit! Cash, as they say, is king, but in this context, cash flow is certainly queen.”
Surviving the shortfalls
Sooner or later, it is very likely that you’ll find yourself in a common situation of not being able to pay your bills due to a lack of cash. This certainly does not mean you’re a poor businessman, you’re a normal entrepreneur who can’t precisely predict the future. Have no fear as everyday best practices are here to help you survive the shortfall.
Learning from the real battlefields in the world today and how planning ahead and expecting shortfalls and preparing adequately for them will put your business in good stead for the ride ahead.
“Piss Poor Planning Promotes Piss Poor Performance” 7p’s (military adage)
The key to safeguard the future of your business is cash flow forecasting and preparing for the future bumps in the road ahead to optimise for a smoother ride. Having a clear roadmap in place means risks can be better managed, better decisions can be made and you can be better equipped to deal with unforseen circumstances. If you would like some more information regarding cash flow, here it is.
Becoming aware of the problem as early and accurately as possible is the key to managing a cash flow shortfall. Banks are increasingly wary of borrowers who have to have the money today. They would much prefer to lend it before you need it, preferably months before hand. A banker will be far less interested in helping you out if you have failed to plan and therefore leave you and your business in rather sticky situation.
If you assume from the beginning that you will someday be short on cash, you can arrange for a line of credit at your bank. This allows you to borrow money up to a preset limit any time you need it. Since it’s far easier to borrow when you don’t need it, arranging a credit line before you’re short is vital.
Key points for managing business finances
I have concentrated on the importance of cash flow in this article as it is clearly one of the key factors to business success. There are however a number of points to keep in mind on a daily basis when it comes to managing your business finances:
No help from the bank?
If the banks won’t help you out then turn next to your suppliers. These are far more interested in keeping you going than the bankers, and they have a better insight into your business. It is often possible to to get extended terms from suppliers that can amount to a hefty, low cost loan simply by asking as they are inclined to benefit this mutual relationship. This is especially true if you’ve been a loyal customer in the past and kept them up to date as to your financial situation.
Get paid promptly
Not letting the glow of a significant contract or sale elude you from the importance of getting paid promptly from your customers will put you in good stead.
Don’t allow your customer to define the terms of the payment and being firm regarding this aspect with them is key from the get go and Negotiating the terms that suit you is vital. If you are in a business with a longer delivery cycle then aim for progress or stage payments and make sure schedules are adhered to. Ask your best customers to accelerate their payments by explaining the situation and if applicable offer a discount off the bill. It is also good to go for the worst customers especially those who’s invoices that have not been paid in the last 90 days by offering them a bigger discount if they pay today.
Sale and lease back
If you have assets tied up in the business such as machinery, equipment, computers, phone systems and even office furniture then you could think about selling and leasing them back to free up some much needed cash flow. However the potential issue that may arise is that if you miss payments then you may lose your assets.
Prioritise
Prioritising the bills you pay and when should be carefully thought out. Don’t simply pay the smallest bills first and leave the rest to slide. The cogs in your machine I.E employees need to be paid first as otherwise they will become ex employees and the entire operation will cease to run. Pay your crucial suppliers next, then ask the rest if you can make a stage payment or skip a payment.
As the entire industry of payments adopts more streamlined and technologically advanced systems to help improve the payments cycle for them and their customers there are a rapidly increasing number of FinTech companies offering fantastic products to excel this aspect of the business process. Below is a new and exciting example of some fantastic innovation in the payment industry.
Duesday
This is a Cornwall based FinTech startup that has embarked on a voyage to completely change the way we pay our everyday bills! Duesday is changing the way we pay our recurring bills forever, giving you back control to pay your direct debits how and when you want for free, all while earning rewards along the way. This innovative app means customers are being incentivised to pay early, and have more control over the payment process while earning rewards along the way. This in turn means merchants or suppliers can receive prompt payments and keep that all important cash flow as liquid as can be.
“Duesday is the better way to pay your bills. It’s now easier to make payments, share and split them with friends, pay when it best suits you and keep track of all those pesky bills. Start now. It’s here and free forever” Marcus Kern, CEO & co-founder
This leading innovation is sure to have a big impact in the arena of recurring payments, their new app allows the users to change the payment date, split bills with housemates and friends while radically reducing the transaction cost for the merchants. All your Direct Debits living snug in the App for you to check and manage whenever and however you want.
I hope you have a better understanding now regarding forecasting, planning ahead, getting paid promptly and the importance of cash flow management to ensure your business success.
By Cameron Marsh
