In any business, big or small, cash is king. When you have a steady stream of available cash you can continually invest in growing your business, which in turn should result in more cash.
You can also weather the storms that inevitably arrive sometimes in business, whether that’s a bill you weren’t expecting, a piece of equipment breaking or a downturn in sales.
At all times, even when things are going well, it’s essential to manage your business cashflow in a way that optimises your cash balance. Before we talk about how to do it, let’s look at why this is so important.
Why Is Cashflow Important?
Protects the business
As much as you do what you do for love, the simple truth is that money is at the core of every business. And businesses need money to survive. Real, tangible money - aka cash. If you don’t have visibility over your cash and take steps to maximise it, you’re putting your business at risk.
The reality of business is that things sometimes go well and sometimes not-so-well. Sales can take a dip and unexpected costs can appear. When your business environment throws you a curve ball, cash is the one thing that will save you. Cash buys you time, allows you to make changes, invest in solutions, etc.
Business growth
The more cash you have a available, the more you can invest in the growth of your business. More growth = more cash = more investment = more growth… you get how this continues.
If you want to grow your business, make sure that every penny is being used in the right way because as they say ‘you take care of the pennies and the pounds will take care of themselves’.
Reduces stress
We’ve all been there. We’ve all opened that email or letter to find a bill we’d completely forgotten about and haven’t budgeted for! Dealing with the money in your business can be stressful, if it’s not properly managed. Getting on top of your cashflow is like ticking one more thing off the worry list.
Boosts your confidence
Going about your business whilst knowing exactly what’s coming in and going out, what you can spend and how the future looks builds a lot of confidence. Confidence in how you’re managing things and how you can take action going forward. This confidence in how you’re managing your cash has a knock on effect with your overall confidence in both yourself as a business leader and your business as a whole.
1. Track it
Cash is moving in and out of your business all the time. The 1st step in good cashflow management is to track it well. You should have your eyes on how, when and why cash if moving in and out of your business.
The frequency with which you need to do this will depend on your business type. If you deal with lots of transactions on a daily basis (for example, if you’re running a shop) then you should do it daily. If you’re running a service-based business with larger, less frequent transactions, then you will likely be able to track it safely on a weekly or monthly basis.
2. Forecast it
Alongside looking at what HAS happened with your business cash you should also be looking ahead at what’s GOING TO happen. There’s nothing more anxiety-inducing than having a bill ‘pop up out of nowhere’ and eat up your entire cash balance.
Forecasting your upcoming cash movements means you always have visibility of what to expect over the coming weeks / months, and whether that will lead to any cashflow challenges.
Part of your cashflow forecast will include regular payments that happen on a schedule. This is the easy part to forecast and can often be done by looking at your past bank transactions, to see when each movement happens in the month.
There are also often business transactions that result in different timing between the transaction occurring and the cash moving. An example of this would be a service you use now but pay for later. Or a piece of work you do today but get paid for next month. For the purpose of creating a robust cashflow forecast, for these transactions, make sure you are forecasting when the actual cash will move.
3. Collect on invoices
Now that you’re both tracking and forecasting your cashflow movements it’s time to work on improvements. Number one on the list here is to get paid. It might sound obvious but there are so many things to think about when you’re growing a business and sometimes the simple things get missed.
It’s critical that you have a good system in place for tracking who owes you money and making sure they pay on time. The more money you have outstanding, the bigger the risk to your business. So make sure you’re collecting what’s owed to you systematically.
If you’re having trouble collecting money from your customers then consider limiting the supply of any further goods or services until their account is clear. This will reduce your exposure to cash losses in the meantime.
4. Cut unnecessary costs
Another thing that can happen when we’re busy growing our business is that we lose sight of every little expense we’re incurring and whether it’s really necessary. I’ve put together this free tool for you to use to help keep on top of this.
On a regular basis, use your bank statement to list out every single expense you incurred in the previous period (for example a month or quarter). Against each item, write down how much the expense was and also what it costs (or could cost) your business on an annual basis.
Next, against each one, write ‘keep’, ‘cut’ or ‘reduce’, based on 1. whether the expense is really necessary and 2. whether there’s a way to pay less for it. Total up the monthly and annual savings you will make by adjusting your expenses in this way. You’ll probably be surprised by how much the little things add up!
Now for the most critical step - take the action required to cut / reduce the costs you’ve identified and don’t stop until every one is crossed off the list.
Doing this exercise can save thousands each year on unnecessary costs. Thousands that can be put towards growing your business or paying yourself. Seeing that total annual figure is great motivation for taking action!
5. Negotiate supplier payment terms
When it comes to the expenses you absolutely need to keep, the next step is to look at your supplier payment terms. It’s important to look at both when the cost needs to be paid and how it needs to be paid. By the latter I mean whether the payment can be spread over time or has to be paid all at once.
At a minimum (where possible) you want the timing of your costs to match the timing of your income. Even better, you want to receive your income before needing to pay your costs. Not only will this mean that you have the cash available to pay your suppliers but it also limits the risk you have within your business.
If you have payment terms that can be negotiated, figure out the timing that would be best for your business and speak to your suppliers. If you’re a new business or it’s a new supplier to your business they may initially say no. This is common, so don’t worry too much about it. Suppliers generally like to build a relationship with new customers before agreeing to adjust their standard payment terms.
If this happens, simply ask when they would be willing to review it with you again. Most companies have a policy for this and will happily have the conversation in a few months time.
To Wrap Up
Taking the necessary steps to maintain a healthy cash balance in your business is an ongoing task, but it needn’t take up lots of your time. In fact, by putting these systems in place it will likely SAVE you time. Time you would have otherwise spent freaking out when an unexpected bill came in or worrying about what could be around the corner. So, I guess, time AND sleep my friend.
And, let’s face it, we could always do with more of both, so take a moment to action these 5 steps in your business today and start watching them papers stack my friend.
As ever, if you want more hands-on support in launching and growing your business reach out to me about 1:1 coaching. There’s really nothing you can’t do with the right support.
