Cash flow is the movement of money within a business, both income and expenditure and is key for business survival and growth.
Poor cash flow management has put an end to many otherwise successful businesses and this shows that nobody is safe from the dangers of running out of cash.
Some of the factors that cause cash flow problems are listed below.
- Too many Debtors (Customers that owe you money)
- Too Many creditors (Suppliers that you owe money)
- Insufficient working capital.
- Over trading or over investment.
Too many debtors:
If your customers are paying you too slowly or not at all this will put pressure on your cash flow and mean that you cannot meet your commitments. So what can you do to avoid this happening ?
Know your customers - before doing business find out what you can about your customer and their credit worthiness. Consider having a look at their accounts or run a credit check to get an idea of what the market suggest their credit limit should be and don’t exceed this.
Monitor credit limits, many credit agencies will offer a service to alert you if information comes to light which suggests you should reduce credit limits.
Set out terms of payment clearly from the start. If these are not adhered to monitor the customer – slow payment of your invoices can indicate cash flow issues at their end.
Consider offering discounts for prompt payment or charging interest on late payments.
If you provide a regular service consider setting your customers up on Direct Debit or standing order payments.
Raise invoices promptly and always monitor the outstanding balance. If invoices are not getting paid consider stopping supplying and most of all don’t let the situation get out of hand before taking some action.
Too many creditors:
Consider your business costs carefully and only buy what you need.
If you are buying goods for re-sale, consider you stock levels – this is effectively cash tied up until you sell. Also consider slow moving or potentially obsolete stock – consider sales to shift this and turn it into cash.
Consider purchases of new equipment carefully and the funding needed to buy. If you are buying a long term asset ensure you have suitable long term financing in place.
Think about leasing assets rather than buying out right.
Try and agree beneficial terms or discounts for prompt payment.
Insufficient working capital
Ensure you have enough capital in the business to meet you on-going costs.
Preparing a regular cash flow forecast can help here to see when cash flows might be tight. If you have this information you can talk to your Bank manager or other lenders and make them aware of this – they are far more likely to help if they are made aware in advance.
Ensure long term capital investments in equipment or business property are funded by suitable long term loans and not out of working capital.
Talk to the taxman, in my experience over recent years they have been willing to accept payments over a period of time to ease short term cash flow issues if they are made aware of the situation and you can put a reasonable proposal to them and stick to it.
Over trading or over investment
Many business opportunities may be very profitable but you have to have sufficient cash to see them through.
Taking or jobs that are too big for you or trying to grow too quickly can put pressure on your cash.
You must ensure that you have enough funding to see a project through so plan carefully and prepare budgets before you take on big projects or investments.