Many aspiring entrepreneurs dream of huge profits when they start up a business. The reality is, however, that without an effective cashflow system, your business won’t survive long enough to pull in a dollar surplus.
In its simplest form, cashflow is about making sure there isn’t a big gap between the money you pay out to staff, suppliers and other overheads and the money you receive from clients and customers.
Delaying the former for as long as possible while encouraging prompt payment of the latter has traditionally been the way to ensure healthy cashflow, allowing your business to operate day-to-day as well as grow.
Offering discounts for early payment, credit checks on new customers and rapid invoicing will help, as well as entering into flexible payment terms with suppliers, rather than just going for the operator that offers you the best rate.
However, you will need to be smarter than this is you are to do more than simply keep the wolf from the door.
It may be time-consuming, but a detailed financial projection will help you keep on top of your cashflow. This will help you stop living hand-to-mouth, hassling customers for payment while frantically putting off your account payables.
Identify the sources of your income and where your outgoings end up. Draw up a monthly or weekly cashflow forecast that will cover the coming year. Be realistic about your cashflow and match it up against your business plan.
Be aware of problems that may arise before they do. For example, if your business is one dependent on seasonal trade, such as an air-conditioning supplier, make sure you forecast the fluctuations in your income.
Get your pricing right. Many small businesses under-price their products or services, thinking that they will be able to increase their fees once they are up and running. This strategy rarely works and risks strangling the business at birth by under-funding it.
Keep your projection up-to-date and regularly check to see if there’s any drop off in sales. If there’s a problem, deal with it swiftly. If sales are down, is your marketing or quality control at fault? If so, deal with it. Don’t file away your declining numbers and hope they go away. They won’t.
Time your payments as much as you can so that they come out after you’ve been paid yourself. Keep your overheads lean and if you see trouble on the horizon, consider a short-term loan to get you through.
Establish a clear credit policy for customers and make sure you are swift in your invoicing. Don’t be afraid to tenaciously chase up debtors.
If you do take on debt yourself, make sure you factor this into your projections. And don’t feel that compliance with the tax office will be an optional extra. Find out what your tax obligations are and manage them.