As a young entrepreneur, managing your business cash flow needs to be at the top of your priorities list. The phrase Cash is King should be something that is at the forefront of you mind when making decisions in your start up. Maintaining a positive cash flow can literally mean the difference between life and death for your business.
We have laid out 5 tips below which will help you to manage your business cash flow.
It can be tempting to let customers boss you around with payment terms when you’re starting out, and in the early days you will likely be desperate to get work in. But the last thing you want when cash flow is tight is to provide goods or services and then not get paid for months on end. Decide early on what payment terms work for your business and do not deviate from them. If someone refuses to pay you on time for the work that you’ve done, then you really need to question whether you want them as a customer. Plus, people will respect you more for sticking to your guns and insisting that they pay up by due date. Also see our article on getting paid on time, which contains some great tips from FreeAgent.
To help maintain a positive cash flow, you need as much time as possible to pay your suppliers. Try and negotiate supplier payment terms which are at least as long as your cash flow cycle. This is the period of time it takes you to produce and sell your goods or service, then collect the money from your customers. As a guideline your supplier payment terms should always be at least the same as you customer payment terms. Though in an ideal world supplier terms should be longer.
Don’t underestimate the importance of credit control in your business. You should never rely on customers to remember to pay you on time. You need a robust credit control process in place to ensure that your payments are received smoothly from customers. You should be sending out reminders in the lead up to an invoice becoming due, and then chasing relentlessly if anything passes its due date. Your cash flow can quickly turn negative without strong credit control.
It’s important that you understand how your patterns of spending and collecting cash are going to impact on your business over time. Creating a cash flow forecast is an important part of getting to grips with what you can afford to spend based on your predicted sales. We would suggest creating a rolling forecast which you update a minimum of once a month. Don’t just create an annual forecast and then not update it to reflect your actual activity.
Last but not least, keep your overhead costs down. This may sound like a blindingly obvious statement, but in practice many young entrepreneurs come unstuck here. Until you know that you consistently have enough cash flow to cover a new monthly cost, don’t commit to it. It may sound like a great idea to hire a new person, or sign a lease on some office space. But don’t do it until you have enough regular work in the pipeline to be confident that you can pay for it. Things can turn sour very quickly if you find yourself in the position of not having enough work to pay your bills. So make sure you build up your sales pipeline first.