A business can survive for a short time without sales or profits. But your business needs cash to pay bills and to continue operating. Since cash flow issues can cripple a business, the more warning you have of peaks and troughs, the more time you have to deal with them.
It may sound obvious, but if you never run out of cash and can pay your bills, you’ll likely never go out of business. From budgeting to early warning systems, there are many ways to track your money. Consider the following:
Use Accounting and Cash Flow Software
Accounting software makes it easier to prepare budgets and forecasts; you can access information coming straight from your bank account. You can also quickly update a monthly cash flow forecast and make “what if” calculations.
Prepare Realistic Cash Flow Forecasts
If you prepare and update monthly cash flow forecasts showing what cash you expect to come in and what cash will go out, you should know in advance when you might run into problems. Being able to spot any cash flow red flags in advance will give you time to correct any problems and make necessary adjustments.
Monitor Key Figures
Decide which profit warning signs hint at a deteriorating cash situation. Comparing short term performance measures to the long-term cash forecast can quickly reveal if sales and profits are going to plan. For example, you could monitor every week or month the following:
- Watch your gross profit margin to ensure it’s not slipping. This is often caused by paying too much for raw materials or products.
- See if you or your staff are offering discounts that are too high to beat competitors.
- See if raw materials or inventory levels are slowly building up. This can signal either a slowdown of sales or products that customers aren’t interested in buying.
- See if customers are exceeding their credit limits and are paying their invoices too late.
Grow at the Pace You Can Afford
Before taking on any large financial commitment, including major new orders or equipment purchases, check that you will have sufficient cash flow to pay. More business may seem attractive, but you don’t want to run out of cash to fund this growth.
Non-Financial Red Flag Warnings
Develop red flag systems on less obvious signals to warn you, such as:
- New lead queries are falling, or customers are taking longer to confirm a sale.
- A substantial or loyal customer stops buying or they’ve switched to your competitor.
- Fewer phone queries or less web traffic or fewer new followers on social media.
- A decrease in local foot traffic, which can lead to long term lower sales.
- A shift in consumer behavior.
- A new competitor opens nearby and is targeting your customers.
How to Reduce the Chance of Your Business Running Out of Money
There are a number of ways to minimize the risk. The most obvious tactic is to have enough cash reserves to be able to ride out any fluctuation or downturn. Every business should always be looking to implement the following:
Get Progress Payments
When negotiating contracts with customers, make generating cash flow one of your primary objectives by asking for deposits or progress payments. Staged payments improve your cash flow and protect you from total loss if a customer fails to pay.
Invoice Immediately
Improve your sales and profit margins by invoicing on the same day. Consider collecting payments using mobile payment options immediately after any work is complete. With larger customers, ensure you have purchase order numbers in advance so you can enter the customer’s payment cycle faster. If appropriate, follow up and confirm the invoice details and due date.
Tighten Up Your Credit Control
Efficient credit control systems speed up cash collection and reduce bad debt, saving time and showing lenders and investors that you run your business professionally. Consider debt collection agencies or lawyers specializing in debt collection can be effective in difficult credit situations.
- Run a credit check on all customers before extending credit terms, even if it’s with a well-known business.
- Control how much credit you provide and with whom you provide credit. Consider using a credit scoring system and set appropriate credit limits for all customers so no one can put your business at risk by owing you substantial amounts of cash.
- Ask for deposits and partial payments before you start any work or supply products.
- Monitor and follow up on late payments systematically by tracking down the largest debtors first.
- If charging interest on late payments, state it on your terms of trade and have the customer sign the agreement.
Limit Expenditure
Regularly ask suppliers to renegotiate. Consider carefully when purchasing capital equipment or any other large-scale purchases. Ask yourself whether you really need the equipment, or if it can be borrowed, leased or rented instead.
Accurate Stock Control
Good stock control can release substantial sums of money as it prevents you from having large amounts of money tied up in inventory or raw materials. Use inventory software to hold just enough stock to service customers on an on-going basis.
Summary
It is important to be aware that even if you are profitable and sales are increasing, a lack of cash flow can still significantly harm your business. Create contingency plans, including how much additional working capital you’ll need to fund any increase in sales and the associated costs of job growth. Have cash in reserve or a plan to access capital to remain in business. Finally, monitor that you’re not withdrawing too much capital so that it puts your business at risk. All of this can help you decrease your business’s chance of running out of money.
