Cash flow is one of the biggest obstacles facing small businesses trying to secure funds for their growth. On top of ongoing expenses and bills, poor cash flow strategies can negatively impact a business’s customers, staff and clients. Here are some of the potential reasons why your business’s cash flow may be out of control, and how you can change things up to make your business thrive once more:
You don’t know the difference between cash and profit
Profit is the difference between a business’s income and expenses. Cash is how much money the business has in the bank. Even if a company is considered profitable, as its expenses accumulate (paying off loans, purchasing equipment etc.) the business can still go broke if customers fail to pay on time.
To avoid problems like timing issues, businesses should work to build up their working capital (short term cash). Using an income and expenditure budget (which tracks how profitable a business is) as well as a cash flow budget (which represents cash inflow and outflow each month) can help build up working capital.
You don’t monitor your cash flow budget
Businesses need to learn how to create and use a cash flow budget, so they can monitor their financial information on a monthly basis and analyse the information so any necessary changes can be made immediately.
You’re not managing your debtors
If your customers aren’t paying on time, here are a few methods you can put in place:
Provide specific quotes that include the due date for payments
Organise to receive deposits or payments up front
Don’t wait to send an invoice – send your bill as soon as the work or project is completed
Format your invoices correctly with the specific due date for payment (rather than ‘in 14 days’)
Make it easy to be paid by offering BPAY, EFTPOS, credit card and website facilities
You misunderstand short term and long term cash requirements
Short term cash, also known as working capital, is money needed to cover the period between when working for a customer commences, and when the customer pays for the work. Long term cash is money that every business needs to buy or set up a business, fund medium to long term growth and asset/equipment purchases.