Why cash flow is so important to small businesses
Many new business owners are unclear as to what exactly is meant by cash flow, and to be honest it can be a little confusing. So, for now, let’s think about it like a financial water tank. Water goes out and water comes in. You always need water, so the trick is to ensure you have more water coming in than you have going out.
Essentially, it’s the same principle here. The old saying ‘cash is king’ is completely correct, since whilst on occasion you may wish to borrow money in order to invest and grow your business, for example by purchasing new equipment or expanding your premises, having cash in your hand puts you in a far stronger position and negates the necessity for you to rely on borrowing against future earnings.
Positive inflow is the way to grow
Cash inflow is essentially the beating heart of any small business. You need it to survive. It arrives in the form of third-party investments, receipt of payments from your customers, interest which you may accrue on your own investments or other savings, or money you receive in the form of a loan.
Cash allows you to make payments for essential business expenses such as employee salaries, rent and stock. Positive cash inflow means your business is succeeding. You are turning a profit and can cover your bills each month. Even better, with a high positive cash inflow, you are able to begin thinking about expanding and growing your business.
On the flip side, negative cash inflow means that you have more money going out than you have coming in. This is common phenomena amongst small businesses, and it’s not something which can always be avoided. However, there are steps you can take to ensure you turn a negative cash flow into a positive one in the shortest time frame possible. I’ll talk you through the key ones to consider now.
Perfect the art of perfect planning
It’s essential when starting any new business to ensure you are fully informed and have planned ahead for every eventuality. I suggest beginning by establishing your baseline. Consider the amount of cash you have to work with, money which has already arrived in your cash inflow tank. Then make a comprehensive list of all the start-up expenses you reasonably expect to incur. These can range from legal fees, construction or decorating bills, marketing materials and media campaigns, property purchase or rental costs, to furniture, stock, and other equipment etc.
The next step is to estimate your monthly cash inflow. This may include projected sales figures; but do be conservative at this stage. Better to err on the side of caution than find yourself with a negative cashflow at the end of the month simply because sales haven’t picked up as quickly as you hoped. We entrepreneurs are, by definition, optimists – sometimes overly so.
Now you need to calculate your projected monthly expenses. Be sure to account for incidentals such as travel, web hosting, taxes and loan repayments – and don’t forget that you will also need to pay yourself!
Ensure that you are thorough and honest with your figures. If you conclude that your expenses are greater than your cash inflow, then look to see how you can cut your expenses. Look for cheaper premises, consider reducing the amount of stock you initially invest in and think seriously as to whether you can afford to take a pay cut yourself in the initial stages.
Don’t let your customers let you down
Once your small business is up and running, one of the major factors which can play havoc in disrupting your cash flow is customers who don’t cough up the cash on time. It’s incredible the amount of people who don’t pay when they should simply because they don’t like handing over their money – even when they’re already in receipt of the goods or services.
Luckily there are a few simple steps you can take to maximise the chance of your customers paying you in a timely fashion.
• Ensure that you invoice all customers promptly on the agreed date each month, and follow up on the status of the invoice regularly.
• Consider requesting an upfront payment or deposit.
• Offer a discount for early payment. For example, if you usually offer a thirty-day payment term then offering a 5% discount for payment within 12 days may help that cash reach you faster.
Better in your cash inflow bucket than festering in the customer’s pocket.
Make friends and influence people
Establishing a good relationship with your suppliers is one of the most useful things you can do for your business. If they trust and like you then your life will be so much simpler if you ever need to ask them for a payment extension. It will also make your work life far happier and less stressful, and will give you a much better shot at generating a positive cash inflow for your new small business in the shortest amount of time possible.