Cash Flow
Biz & Co

How small businesses can avoid cash flow problems

The old saying “cash is king” applies now as much as ever before even in our world of online banking and 24 hour access to our bank accounts. Cashflow in a business is what keeps it healthy and without strong cashflow any business will struggle, no matter how innovative its products or impressive its service. Healthy cashflow is essential for growing a business whether it is still a fledgling startup or whether it is a well-established business. Equally an unhealthy cashflow situation can cause what could have been a successful business to go under. So, if you’re a small business, how can you avoid running into cashflow problems and mitigate all the risks that brings with it?

Keep one eye on the future

Cashflow forecasting is one of the most crucial skills for small business owners to learn. While none of us can actually predict the future, the ability to look ahead and accurately estimate the peaks and troughs of your cashflow will give you the power to plan and prepare for what might occur. With that kind of insight you can avoid many of the cashflow problems that drag small businesses down. But be aware that even the best financial forecasting and estimates cannot help you avoid difficult situations such as losing a valuable client or customer. This is when careful cashflow management that has built up emergency reserves is truly valuable.

Switch your focus

For many SMEs, the focus is often placed squarely on making a profit. Perhaps you’re a start-up desperate to prove the potential and viability of your proposition. Or maybe you’re a small business with some fierce competitors but are determined to prove that your product or service is superior and also better value. Either way, when it comes to finances, too many small companies get stuck on profit when in fact it should be cashflow that takes up all the focus, effort and attention of those controlling the financial reins. Positive cashflow management – not profit focus – is what makes businesses thrive. If you’re successfully managing the distribution of cash in your business then you’re driving growth, increasing efficiency and creating reserves for the difficult times.

Payment policies are important

No matter what the industry, getting paid is an important part of the process for SMEs. That’s why it’s so crucial to have a strong payment policy that makes clear the time within which payment is expected, as well as the penalties that will be applied if it arrives late. The fear for small businesses is often that a heavy handed approach to chasing up payments will put clients off; and losing existing clients is one of the top financial fears of business owners according to a recent report by Solution Loans. However, given the very negative impact late payers can have on cashflow, the real question is whether clients like this are worth having in the first place. Ironically, the same report gave managing cashflow as an equally high issue of concern to business owners. So try and separate the poor payers from the good clients and customers with payment policies that are clear and unambiguous.

Create a reserve

Sometimes no amount of cashflow forecasting or clever accounting can avoid a problem with resources in the business. This is where you need to be able to rely on a financial safety net to see you through until your cashflow starts moving again. The optimum position is to have reserves of cash in the bank but for small businesses this is often unrealistic. So, finance such as overdrafts and loans can be a simple and effective way to dip into the cash that you need to tide you over.

Budget – but have a plan B

Budgeting will keep you attuned to where the cash in your business is going. Create budgets in advance and then check these against actual spend to see how close – or far off – you were. However, remember that budgets are very easily tipped off balance and so it’s always important to have a plan B. How will you meet your outgoings if this budget doesn’t work out, what’s the back up plan?

Avoiding cashflow problems is crucial for small businesses looking to thrive. These cashflow management tips provide a solid foundation for positive growth.