Your new business needs a fluidic flow of money (in and out) in order to succeed. These eight elements of cash flow management can help you ensure there’s always money in the bank.
Content in this guide
- Preparing cash flow projections
- Forecasting the breakeven point
- Improving receivables
- Managing payables
- Managing Shortfalls
- Ensuring you have working capital
- Cash flow mistakes to avoid
- Cash flow tips
Cash flow is the lifeblood of any business. Your business can have a profitable concept and great execution, and still fail because of poor cash flow management. It will be challenging to succeed as an entrepreneur without proper financial management protocols in place.
The main issue when dealing with cash flow is the lag in time between when you need to pay your suppliers and employees and when you collect income from your customers. The solution is a cash flow management process that allows you to tailor when money is coming in versus money going out.
Often start-up entrepreneurs make the mistake of trading from their personal bank account. This makes it harder to differentiate between your personal expenses and business expenses. It also doesn’t allow you to build up a credit risk profile for your business, which is an important factor should you ever want to approach a bank for financing. Rather, start trading as a business from the get-go by opening up a Business Current Account.
Here are eight key cash flow concepts that will assist you in better managing your new business’ money:
1. Preparing cash flow projections
Forecasting your cash flow for next year, next quarter and potentially even next week, is a solid way to manage your money if you’re still in the hand to mouth stage of starting up. An accurate cash flow projection can identify an obstacle well before you’re actually faced with it. It allows you to develop a strategy to deal with the looming challenge.
Related: How to better manage your money in your business
Keep in mind that cash flow forecasts are not set in stone, it is an educated guess based on various factors, including:
- Your customers’ payment histories
- Your expertise at identifying upcoming expenses
- Your vendors’ patience.
However, don’t assume in your projection that you will continue to receive your business’ supplies at the same rate in perpetuity, or that your payables can stretch the same as it previously did. Also include expenses such as:
- Capital improvements
- Loan interest
- Principal payments
- Seasonal sales fluctuations.
Where to start
Start your cash flow projection by ensuring you have cash in hand at the beginning of every cycle, along with receiving other cash from previously planned sources. During this researching and planning process, you can gather information from salespeople, service representatives, collections, credit workers and your finance department.
The type of information you need to include are: How much income, in the form of customer payments, interest earnings, service fees, and partial collections of bad debt your business will receive and when.
2. Forecasting the breakeven point
The next step in making an accurate cash flow forecast is precision knowledge of the amounts and dates of upcoming cash expenses. This means you need to know not only how much is spent on any given day, but what are you spending the money on too.
You should have a line item for every significant cash expense, including:
- Salaries and wages
- Taxes withheld or payable
- Benefits paid
- Equipment purchased
- Professional fees
- Office supplies
- Debt payments
- Vehicle and equipment maintenance, and fuel
- Cash dividends.
“As difficult as it is for a business owner to prepare projections, it's one of the most important things one can do,” accounting experts say. “Projections rank next to business plans and mission statements among things a business must do to plan for the future.”
3. Improving receivables
If your business receives payment the minute you make a sale, your business would never have a cash flow problem. However, that doesn’t always happen. You can, however, improve your cash flow by handling your receivables properly.
The main idea behind improving receivables is refining the speed with which you turn raw materials or components into products, products into receivables, and receivables into income. Here are a few specific tricks for achieving this:
- Offer discounts to customers that pay on time
- Implement a deposit payment at the time of ordering to ensure your customers have already paid for a portion of their cost
- Credit check all your new non-cash customers
- Sell old or outdated inventory for as much as you can get for it
- Issue invoices promptly and follow-up straightaway with customers who are slow payers
- Keep an eye on accounts receivable in order to identify and avoid slow-paying customers
- Alternatively, you can institute a cash-on-delivery policy, instead of refusing to do business with slow-paying customers.
Related: The statement of cash flows explained
4. Managing payables
Having top-line sales growth can cause you not to see the issues in your cash flow process. When attempting to grow a business beyond the start phase, you need to keep an eye on your expenses. Don’t allow growing sales to lull you into a state of complacency.
If there is ever a time when your expenses are growing faster than sales, you should examine your costs to find where you can cut and control them. Here are a few tips on how to use cash more wisely:
- Take advantage of your creditors’ payment terms. If the payment is due in 30 days, don’t pay it in 15 days, unless you receive a discount for doing so
- An alternative is to use electronic funds transfer to make the payment on the last day. This will allow you to pay on time while retaining the use of your funds for as long as possible
- Communicate with your suppliers by including them in your money situation, they will be more trusting and understand if you need to delay payment
- Keep in mind that some vendors offer discounts to those who pay early. Take advantage of this offer when you can as it’s a chance to reduce your overall costs. Just ensure you aren’t short-changing someone else in the process.
- When choosing suppliers, don’t just focus on the lowest price. A flexible payment term can be more of a benefit when it comes to improving cash flow than a bargain-basement price.
5. Managing shortfalls
You’ll know you’re in this awkward position when you lack the cash to pay your bills. This doesn’t mean your business is a failure or that you as a businessperson has failed.
Finding yourself in this position is a normal part of becoming an entrepreneur and it shows you can’t always predict the future. Besides, there are normal, everyday business practices that can assist you in managing your business through a shortfall.
Who to turn to?
A vital component in surviving a cash shortfall is to pick-up on the issue early and as accurately as you can. When trying to mitigate the results of a cash short fall, keep in mind that banks can be wary of borrowers who need to have money ‘urgently’. It’s better for you and for them if you ask them for a loan before you actually need it, preferably months before. This reveals to your bank that you had enough foresight to see the challenging period coming and planned for it. A bank is not going to risk loaning your business money if you’re in this predicament because you failed to plan ahead.
If you’re planning for the future, it’s a good idea to arrange for a line of credit at your bank. This will allow you to borrow till your limit and any time your business needs a cash injection. Since it’s always easier to borrow money when you don’t need it, arranging a credit line before you find yourself in a shortfall is vital.
During the course of running and growing your business, you will need access to both short-term and long-term cash savings to pay salaries, suppliers, or even to save for a future project or large payment. Standard Bank provides a range of flexible Savings and Investment solutions, with competitive interest rates, to help you meet your business’s savings and investment needs.
If turning to your bank is not an option, you can look to your suppliers. They are actually interested in keeping you going, and might know a lot more about your business than you actually do. You can negotiate extended payment terms. This is even more likely if you’ve been a good customer in the past and kept them up-to-date on your business’ financial situation.
You could consider using factoring too. These are financial services that can pay you today for receivables you’ll only collect in a few weeks or months. You’ll only receive around 15% less than usual, since factors demand a discount. However, you’ll eliminate having to collect and be able to fund current operations without needing to take a loan.
You can also ask your best customers to accelerate their payments. Explain your situation, and if you need to, offer them a small discount. You can also target your worst customers, those that have outstanding invoices 90 days past due. Offer them a discount if they pay today, or maybe impose penalties for late payment.
Desperate times arguably call for desperate measures, which could lead you to selling and leasing back your assets. You can possibly sell and lease back your:
- Phone system
- Office furniture
Leasing companies can perform these transactions. On the other hand, it won’t be cheap and you could lose your assets if you miss a lease payment.
After you’ve made one of the above work, or perhaps a combination of the above work, it’s important which bills you choose to pay. Don’t pay the smaller quantities and let the others lapse. Make payroll your first priority because your unpaid staff could become ex-employees. Second, pay your crucial suppliers next. Ask the rest if you can skip a payment or make a partial payment to enable your business to get back on its feet.
Related: Cash flow management
6. Ensuring you have working capital
Working capital is the cash your business needs to pay its suppliers, expenses and employees. It’s part of the cycle of buying materials, selling inventory and receiving payment for inventory. After you’ve started your business, it will take some time to start breaking even, never mind making a profit, however, you will still need sufficient cash reserves to keep your business operational.
You need to manage your working capital by effectively handling the elements within the cycle. An effective tool to ensure you have working capital is cash flow forecasting. This will ensure that every payment your business makes, whether its weekly, monthly, quarterly or annually isn’t forgotten.
Here are some top tips to ensure you have sufficient working capital:
- Develop cash flow forecasts and compare actuals to your forecasting
- Collect your debt faster
- Negotiate better terms with your suppliers, and don’t pay them before you have to
- Shift inventory faster or lower your stock holding
- Don’t buy anything expensive until you’re sure your business’ cash flow can handle it
- If you’re currently raising funds for a new business, ensure you have enough cash reserves and always over estimate your expenses.
7. Cash flow mistakes to avoid
No matter how perfect your business model is, how profitable you are or how many investors are interested in supporting your business, your business won’t survive if you can’t manage cash flow.
A study found that 82% of start-ups and small businesses fail due to poor cash-flow management. Here are three common cash-flow problems that you should look to avoid:
1. Overestimating future sales
Relentless optimism is a key trait of any successful entrepreneur but while optimism is vital for a new business owner, it can let you compromise your objectivity. This can be dangerous for your cash flow. It’s important to complete an objective and realistic sales forecast based on historical evidence and real numbers.
2. Impulse spending
By trying to ‘spend money to make money’ you can fall prey to overspending, especially in the first few months of operation. Keep in mind that not all start-up expenses have equal importance, consider the cost-benefit of every single expense to ensure you don’t hire consultants you don’t need, or purchase machinery you’ll never use.
Along with your revenue forecast, develop a realistic budget, and stick to it. Calculate when you plan for your business to break even. When unexpected expenses or impulse spending opportunities come along, you can go back and determine how long those purchases will delay your break-even point.
3. Past-due receivables
One of the fastest slayers of small businesses is unpaid invoices from clients. You need to be proactive about collecting payments from your clients or you could face a trying cash-flow situation.
If your customers don’t hear from you the minute a payment is late, you’re sure to be the last vendor they pay. Implement policies such as including a 5% late penalty after five days, and work stoppage after 30 days past due, if your business is service-based.
Related: Cashing in on cash flow
8. Cash flow tips
Guarantee your business’ health by keeping your cash flowing in and out appropriately. Here are six tips on how to better manage your cash flow:
Tip 1: Breaking even
Knowing when you’ll be breaking even will give you a goal to strive for and a ready-made target for forecasting where you should focus your cash in order to reach that goal. By focusing on the goals and not the amount of money your business is making, you’ll spend the money smarter and budget correctly, until you’re making a profit.
Tip 2: Cash reserve
Your business should expect cash shortfalls, because it happens to most businesses when starting up, even companies in the best financial positions. Your survival will depend on how you navigate through those shortfalls. Having a cash reserve on hand will lessen your business’ recovery time and allow you to stay focused on growth.
Tip 3: Spend only on essentials
A section of your forecasting model is dedicated to laying out your future necessary expenses. Outside of these essentials, minimise the amount you’re spending. This will assist you in reducing costs that aren’t essential to your operation until you’re profitable.
Tip 4: Managing your funds
Unless you have no other choice, only you should deal with your business’ money. This means tracking it and handling the accounting. You could also hire a professional accountant to handle the cash so you can focus on running your business, and pushing it in the direction you want it to go.
Remember that you must designate someone trusted to be your cash-flow monitor if you can’t handle it, as there needs to be someone with undivided attention focused on your cash-flow in order to make your business a success.
Tip 5: Smart hiring
Hiring talented individuals is going to cost you more but you’ll only need to hire one person to do what three or four others would have done. Additionally, these three or four employees would also have made more mistakes and cost your company more. You want to hire people that are going to give you the fastest return on investment. “The secret to successful hiring is this,” says Marc Benioff, CEO of Salesforce. “Look for the people who want to change the world.”
Tip 6: Use technology
Back-up your files and cash-flow spreadsheets, to secure cloud storage platforms. This will keep your data secure from local file corruption, data loss or theft. It will also save you time and money to be able to access your information from anywhere in the world.
Your business can have a profitable concept, flawless execution and talent in every department, and it might still fail if you don’t look after your cash-flow. Your money remains the lifeblood of your business. Without working capital your business isn’t going to be able to purchase raw materials or components and without that step, your business can’t make inventory and can’t sell anything to customers. A proper financial management solution is essential to move forward.