There’s one overwhelming reason why small businesses don’t make it. They run out of cash: plain and simple. Cash is king in business. Whatever your balance sheet and P&L may tell you, the real indicator of the health of your business is your cash flow position.
Small businesses need to be smart when it comes to spending their money, and even smarter when it comes to getting their money in. The reality is that if you can’t manage your cash flow effectively, it’s impossible to make it as a business.
Cash really is the lifeblood that keeps your company pumping. This means your accounts department, or those in charge of your credit control, are among the most important members of your organisation. Make sure you hire good people in this field and recognise them accordingly.
Mr Micawber said it most famously in David Copperfield: “Annual income twenty pounds, annual expenditure nineteen pounds nineteen shillings and six pence, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.” A business can only operate for so long when cash outflow is greater than cash inflow.
Sounds simple? Of course. But the problem comes with timing. That’s where many entrepreneurs trip up. They underestimate their own expenses and equally underestimate how long it will take to get paid by their customers. It’s a balancing act that’s hard to get right. Before you know it, the tide’s gone out and it isn’t coming back in again anytime soon.
So what can small businesses do to mitigate this problem? Here are five tips to help improve your cash flow management that I’ve learned in my years running businesses.
- Focus less on profit and more on cash. The profit will come as you build the business but in the short term, if you take your eye off the cash position by focusing solely on profit targets, your business will flounder. Check your finances daily and always know where you are at with your cash.
- Keep some cash in reserve. It’s the unexpected things that can disproportionately hit your business, particularly a small business. Having a buffer will enable you to ride it through.
- Bill quickly, chase bills immediately and implement tactics to accelerate payment. Whether you offer discounts to prompt payers or make it easier to pay by offering more payment methods, it’s vital to get the invoices out and get the money in. It’s equally vital to chase them straightaway if they don’t pay on time and keep chasing.
- Get your payment policies right. Make sure you’re working your own cash hard; don’t pay late but don’t pay early either, so your money is working as efficiently for you as it can. Ask for cash discounts if your cash position is strong instead of buying on credit and negotiate to extend payment terms wherever you can.
- Manage your cost base. The more you keep your costs down, the more money you’ll be keeping in the business, giving you more headroom and flexibility. (That applies whether you’re a start-up or a major corporate, by the way).
From time to time at Peninsula we see one of our clients go under because they haven’t managed their cash effectively. That’s the last thing we want to happen – our clients are hugely important to us and we build close relationships over the years. I hope these tips help you think about your cash flow and to focus on it as the new financial year kicks in.