Let me ask you a question. What do you think is the number one reason businesses fail? If your answer is bad business ideas, lack of execution, too much competition, not enough interest for what they’re offering or something along those lines, you are wrong. It’s the lack of cash flow control.
As much as 82% of businesses fail as a result of experiencing cash flow problems. This means that their boats are leaking somewhere and their cash is going through those wholes. The question is, do you have those same holes and what are you doing to plug them?
In this post, I will present you 10 vital step that you will need to make in order to have a better cash flow control.
1. Make a Cash Flow Plan (and Stick to it)
When driving a car, do you watch the road by looking constantly in the rearview mirror or do you look straight ahead? Of course you are doing the latter. So why would you drive your business by constantly looking back? I’m not saying that you shouldn’t do things like analyze your balance sheets and profit/loss statements, but if that’s all you do, you’ll be blind to what’s ahead of you. That’s what a cash flow plan is – to give you a heads up on future revenues and plan for expenses.
2. Forget Profit, Focus on Cash Flow Control
“Hang on, what?” Most SMEs don’t have a cash flow plan. But that doesn’t stop them from predicting their profit margins for the next five or six years ahead. And that is why they fail within their first year. They are essentially looking to far ahead and forget that, in order to survive, they need to have a solid cash flow. Only once you have this, can you turn your attention to profit forecast.
3. Designate a Cash Flow Monitor
Your business probably has a lot of cash going in and out. Do you have any idea what’s going on there? Somebody needs to keep an eye on the door and track all that money. Designate and train an employee, for example an office manager, to be your cash flow monitor and to make sure you have sufficient cash in the bank.
4. Make Payment Terms Clear
When working with suppliers, it’s important to establish very clear terms beforehand. This includes payment terms as well. You want to know when you are going to get paid and when you need to pay. The last thing you want are overdue payments. They’re the bane of cash flow control.
5. Get Paid Fast, but Extend Your Payables as Long as Possible
On one hand, you want to get your money as fast as possible, but on the other, you want to extend your payables for as long as possible. You can do the first by keeping a strict policy on credit and minimizing net-30 and net-60 payment terms to a minimum. On the other hand, you want to extend your payables to net-30, net-60, or even net-90, if possible. Just mind those late fees.
6. Use Technology for Better Cash Flow Control
Technology can be an invaluable ally in cash flow control. For example, Purchase Order Plus, our add-on for Xero accounting software, can help you manage your cash flow better among other things. Also, cloud-based accounting technologies can help work more effectively and make it much easier to be up-to-date with your financial situation.
7. Don’t Make Payments Complicated
Customers will more often have a bigger problem if you make their payments complicated, then with large payments. This is why, for instance, you should switch to online payments and ditch cheques or anything else that can cause unneeded delays.
8. Work on Your Receivables
If only you could get the money the moment you make a sale! But it doesn’t work that way, unfortunately. However, that doesn’t mean you can’t do a few things to improve your receivables.
Here’s a few things you can do:
- Don’t wait to send an invoice and follow up
- Give discounts and other incentives to fast-paying customers
- Ask for deposit payments when customers make an order
- For non-cash customers, ask for a credit cheque
- Demand cash on delivery (it’s still better than refusing to work with slow-paying customers)
All of these can help you make the stream a bit wider.
9. Get the Bank “in the Know” About Your Cash Flow
You need to be on very friendly terms with your banker from day one. Keep him or her informed about any unexpected and unforeseen changes in your cash flow. Banks like clients that are prudent with how they spend their money, so be sure you are as well. What you also shouldn’t be doing is keeping secrets from your bank. Trust me, they’ll find out eventually.
10. Don’t be Afraid to Make Tough Decisions
As a business owner, you are often required to make tough calls. Some of these decisions will not exactly make you popular, but you have to stop thinking this is a popularity contest and start doing what is best for your business.
If your cash flow gets critical, it’s time to make some of those tough calls. For example, you can cut employee benefits, let non-essential staff go or close down unprofitable departments in your company. Expect a lot of grumbling and unhappy employees, but it might help you save your business (but maybe not your soul).
Cash flow control isn’t the easiest thing to do and you might have to make some tough and unpopular decisions with your customers, suppliers and your employees. But unless you want to end up like so many businesses, these are the 10 steps that you will have to take to manage your cash flow.
Do you have any thoughts or questions? Let us know in the comments below and don’t forget to sign up to receive updates and early access to our Purchase Order Plus software.