By Emily Coltman FCA is Chief Accountant at FreeAgent
When you’re running a small business, it’s important to remember the adage “cash is king!”. That’s because cash is the food that your business needs to survive and, if there’s no money coming in, your venture may face a struggle to survive.
Ideally, a business should have a regular, steady flow of cash to keep it healthy and it should avoid any lengthy periods of starvation - but this can potentially be a difficult balance to strike. Here are five examples of how to manage your cash flow better and keep your business in good health.
Send your invoices promptly
If you run the type of business where you give invoices to clients, it’s very important to send these out as quickly as possible when it’s time to get paid for the work you’ve done.
Not only will you take advantage of the psychological benefit of recency - where your client is more likely to remember the work you did for them because it is still recent and fresh in their mind - but you’ll also ensure your invoice looks more urgent to them. If you wait longer to send an invoice, your clients may not consider it especially important or time-sensitive - especially if they have other more pressing, urgent bills to settle.
Set aside a specific amount of time each week to do your bookkeeping, and make sure that you always spend part of that time on creating, sending and chasing up invoices to ensure your cash flow stays healthy.
Review your payment models
If you generally only take money after you’ve finished the work or sent the goods, you may be unnecessarily taking all the financial risk of that sale - because in the worst case scenario where a customer refuses to pay you, you’ve already spent the time or the costs of making that sale and your business cash flow may suffer a hefty blow. To hedge against this risk, you may find it beneficial to ask customers to pay some, or even all, of your fees up front.
If you’re supplying ongoing services, changing to a monthly billing structure instead of an annual one could also help you maintain a healthier cash flow. You’ll remove the traditional cash peaks and troughs that come when you receive a huge lump payment once a year, but you’ll also make your customer’s cash flow easier because they don’t have to find money for one big bill all at once.
Make it easier for clients to pay
If you want to make things run smoothly when it comes to taking and recording payments into your business, it’s a very good idea to make it as easy as possible for your customers to pay you. So instead of taking cheques which take time for your customers to write, cost them money to mail, and then take you extra time to deposit, why not consider letting your customers pay you online by using Internet banking or a service such as PayPal or Stripe?
Make sure you put your payment details on your invoices, like the routing number and account number of your business bank account. Alternatively, if the invoicing software that you use allows it, try adding a payment link (e.g. a PayPal “Pay Now” button or something similar) on the invoice e-mail. This makes sure that your customer has the payment information handy and can pay you quickly and easily.
Stay on top of your bills and tax dates
Cash comes in but it also goes out - that’s why it’s called cash flow! To make sure you’re on top it, plan ahead so you know when you’re going to have to pay money out from your business.
Make sure you know when you have to pay your suppliers, and keep your unpaid bills separate from paid ones so that you don’t risk forgetting to pay altogether. Stick to your suppliers’ payment terms if you possibly can: after all, you never know when you might need that supplier to go the extra mile for you, so try to keep a good relationship with them.
Remember, as well, that you will also have to pay the tax man. Keep track of what is due and when, and pay on time, to avoid any late filing penalties and interest which will only eat into your cash balance even further.
Remember to forecast
It’s important to know when to expect money to come into your business and go back out again and to identify any areas when you might run out of cash.
For example, if you want to expand your business - perhaps by making a new product, or selling to a different country - you’ll need to know if you have enough cash to do this while keeping your existing business running smoothly.
The best way to do this is to forecast your cash flow so you can plan your future income and spending to make sure that your business won’t run out of the cash it needs to survive. Check out our handy guide for making a cash flow forecast here.