By Viresh Harduth, Vice President, Small Business, Sage Africa & Middle East
Cash flow is the lifeblood of any successful business. It is all about the money coming in and leaving your bank account—the income you receive via customer payments, interest, and other sources versus the money you spend on business expenses. A business can record significant sales yet run out of cash easily because it needs to pay expenses before its customers pay.
A healthy cash flow in and out of your business means you can pay employees, suppliers, rent, rates, taxes, and other operating costs on time. Cash on hand allows you to invest in your business by spending money on technology, marketing, branding, and staff. Conversely, weak cash flow could mean you will need to rely on credit cards and overdrafts to pay your bills.
If you cannot access credit, your business might eventually be unable to keep operating. Cash flow is a long-standing challenge for small businesses. Not only are their clients struggling to pay on time, but they also often face tighter credit terms and conditions from their suppliers and other creditors.
That said, any small business can improve its cash flow in several ways.
Create a cash flow forecast
Making regular and accurate cash flow projections will help you identify potential cash flow gaps before they become problems. Using your accounting software for cash flow forecasting will enable you to understand the flow of money in and out of your business so that you can plan accordingly. You should factor the growth or reduction of your sales and outgoing costs into your calculations.
Invoice promptly and accurately
One of the keys to healthy cash flow is encouraging customers to pay promptly. It is thus important to send accurate invoices with all the necessary info to your customers on time. If your invoices have errors or are incorrectly formatted, customers will send them to be fixed. This will delay payment, affecting your cash flow.
One of the major cash flow challenges SMBs face relates to VAT (Value-Added Tax). VAT is payable at either the payment date or the invoice date. You might need to pay VAT before your customer pays you. As such, it is important to make it easy for clients to pay you quickly and to follow up when they are late.
Manage expense payments as tightly as possible
Getting money in on time is one side of the coin; the other is managing your payments. Work with your suppliers and creditors to balance paying them promptly and managing your cash flow challenges. Unless your service provider or supplier offers a discount or preferential treatment for early payment, pay them on the last possible day.
Instead, you can keep the money in an interesting-bearing account until the due date. But do not pay late to avoid interest and penalties. It is also important to constantly review your expenses for cost savings. Make a practice of getting quotes for insurance, telecoms, and other services each year to ensure you get a good deal. And cut unnecessary expenses to keep your cash flow healthy.
Master inventory management
If you run a business that carries stock, it is important to get inventory management right. The right software tools can help you forecast sales more accurately. Communicating with customers and suppliers, checking on market trends, and analysing past sales can help you ensure you have stock on hand to meet demand without having inventory languishing in your storeroom. If you have paid for stock that is not selling, you could discount it to move it off your books and get some cash in your bank account.
Plan for fluctuations
Most businesses face seasonal fluctuations in cash flow caused by variations in demand, increased expenses during certain times of the year and other factors. Knowing how to predict these fluctuations is essential to ensure you have money on hand to pay for debts. For example, you might need to ramp up stock purchases before the festive season if you are in retail. It would help if you also planned for fluctuations like losing a large client, contract, or even bad debt.
Managing cash flow is essential for smaller businesses
As a small business, you might be operating on tight margins and may not have access to the cash reserves or credit lines available to larger enterprises. Keeping a close eye on your cash flow will enable you to thrive through good times and bad. Cash flow forecasting is simple with the right tools. If you make it part of your admin routine each month, your forecasts should grow more accurate over time, and you will be able to plan around your cash flow with increasing precision.
