Previously I have talked about the importance of having a cashflow forecast, and how to get started creating one. Next in my series of posts about cashflow is my top tips for first aid for when that forecast is looking gloomy.
1. Good decisions need good data
You can’t run a business effectively without up to date information. In particular how much money is owed to/by each supplier and customer.
HMRC is always a key creditor to keep an eye on – the numbers are usually amongst the biggest payments that you need to make, which can lead to unwelcome surprises.
Just as important as up to date accounts is making sure your plan is up to date. Especially in the current climate the future picture can change rapidly so make sure you have confidence in your key predictions (sales, costs and associated taxes).
2. Monitor the vital signs
There is no replacement to monitoring cash everyday, plus most accounting software makes this easy to do. You do need to keep an eye on payments that have not yet cleared, so you know you can rely on the figures.
3. Assess the scale of the problem
In order to understand where cashflow problems arise you need to work out how much cash you need to take each month in order to sustain your spending; the “burn rate”.
This is different from breaking even on a profit perspective; notably it will include loan and finance payments and probably once a quarter VAT payments.
To find your burn rate add together all of your regular spending over a month (or whatever timescale you choose). Compare this to the cash you expect to receive from customers (factoring in VAT!) and the result will show you what you expect the change on your bank balance will be.
4. Quick wins
First things first; chasing any overdue customer debts can bring in cash straight away. This doesn’t have to be aggressive, but opening a dialogue makes sure that you stay at the forefront of your customers’ minds and increases the chances of you getting paid on time.
Get your invoices out promptly; as soon as the job’s finished or on an instalment basis if appropriate. This can make a big difference to the cash that’s coming in.
5. Review surplus assets
There are some assets that every business needs: whether that’s a delivery van, pcs, processing machinery or stock for selling on.
The problem is that this kit swallows up cash (even if you’ve had some credit before paying for it). Take a look at the stuff that you’ve got to hand and consider what it’s worth to you.
Could you raise cash selling off excess stock at a discount? Can you refinance bigger assets (eg vans) to release cash or reduce monthly payments?
This takes a little time and ingenuity, but may reap valuable rewards.
In the short term cash flow is more crucial than profit. With that in mind the first priority should be to tackle jobs that can be completed (and therefore invoiced) quickly. Bigger projects may generate more profit but the cash will take longer to appear in your bank!
Don’t go crazy and give away all your profit margin but it may be worth offering early settlement discounts to attract prompt payment to help with cashflow.
7. Reduce spending
Surely this is the most obvious way to impact cashflow, so why does it come at the end? Well, if your business is short of cash you’ve probably implemented some of this already; cancelling the “nice to haves” and limiting unnecessary spending.
Also, while some costs (often marketing) can seem entirely avoidable it is important to put that in context – the short term gain may come with a longer term cost, so it’s important to look at the true return you’d get on each saving.
If things are really bad you may be able to negotiate payment holidays with lenders or lengthen the repayment term which will reduce monthly outgoings, but look out for penalties and other charges that may negate the benefits.
This is only designed to be first aid for cashflow issues; treatment for long term ailments requires specific advice. Often the hardest part is to be objective and challenge fixed ideas. That’s the time to call in an independent professional.