Poor management of cash is a key killer of businesses. It is an especially risky area for new and growing businesses due to the need for investment, the need to grow their customer base and the likely lack of credit from suppliers.
What does good management of cash look like?
Good cash management means you have enough funds in the bank to pay for your costs when they are due. Your business may be profitable but if you can’t pay your debts when they are due then you will not survive.
The management of cash is often called ‘Cashflow’ i.e. how much cash is flowing in and out of your business and the resulting bank balance. This is why it is easier to manage your cash if you have a specific bank account for your business.
Common reasons for cash issues include:
- Slow paying customers
- Longer than expected time to build the business
- Higher upfront costs than expected and poor credit terms with suppliers
- Money being tied up in unsold stock
Fearless Financials’ top five tips to improve your cashflow:
- Develop a cashflow forecast - this is a common tool used to estimate how much money you expect to flow in and out of your business. It helps you to anticipate when money will be tight and when you may need additional funding e.g. an overdraft or bank loan
- Make it easy for your customers to pay - this includes prompt and accurate invoicing, online payments like direct debits, paypal etc and use of deposits and/or instalments to spread the cost for them and help you gain upfront payment
- Chase slow payers - monitor when payment is due from customers and contact late payers quickly.
- Negotiate terms with your suppliers - explore how you can improve your credit terms and whether there are ways to reduce the amount of money you have tied up in stock e.g. paying supplier upon sale of goods (Sale or Return)
- Spread key costs over a year or more - for example, insurance and utilities can often be paid monthly by direct debit. Expensive equipment can be leased or paid for through hire purchase over a longer period