There are many ways to ensure your business cash flow stays healthy, but most of it comes down to the discipline to keep on top of key practices and good communication with your customers, suppliers and banks.
– It is important to really know your customer. Before you provide credit terms, check that you have all of their information. If the deal is big enough, run a credit check on the potential customer.
– Set and agree your credit terms clearly up-front. Ensure your customer knows exactly when payment is due and to whom, and that invoices clearly show your terms and your banking details. Feel free to offer terms that work for both you and your customer but try to keep them under 14 days.
– It’s important to build good relationships with your suppliers. Ensure you make payments on time whenever possible so if you do have a period of cash shortfall, they are more likely to extend your credit terms.
– If you do hit a rough patch, don’t be afraid to ask for extended terms or to spread your payments over time.
– Review what is selling and what isn’t. Cut the slow moving products and sell them as quickly as possible, as holding stock just locks your cash away.
– Consider some different scenarios – what would happen if your biggest customer didn’t pay? Or if your average payment terms increased? Regularly update it and track your progress to avoid surprises. Here is an exercise – Download last year’s Profit and Loss as a monthly multi-period into excel, then adjust known sales and expense changes for the coming year. Add the formulas to total your cost of sales and calculate gross profit each month. Then the formulas to total expenses and finally the calculation to see your operating profit. You can add a line to put in the opening bank balance, and take out any expenses not actually paid, eg depreciation, so the ACTUAL Cash is recorded. The sales are what you expect to get in the bank CASH, based on customer history. Takes ability of work, but once the template is set up, you can vary figures and see the effect in months to come that can indicate when you will have surplice or shortfalls of cash.
If you need help, we can come and supply a template to plug your figures in and what you aim for in the year to come to see where you may end up at 30 June next year.
– Reconcile your bank account daily to check payments coming in and out. Good accounting software should provide daily bank feeds that are coded automatically so you are always aware of your cash balance.
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