June 13, 2011 at 6:47 PM

In a world where finance is harder to come by, cash is the oxygen that enables a business to survive and is a key indicator of the health of your business. While a business can survive for a short time without sales or profits, without cash it will die.

You can’t manage what you don’t measure

One of first steps to getting good at managing your cash is to know what’s coming in and going out, and what impact this will have on your business. This is about more than just completing a cashflow forecast for the coming 12 months. To do this properly, you’ll need to review your forecast regularly, taking into account some of the leading indicators in your business. Remember, money in your bank is a lag indicator (an indicator of events that have already taken place). A leading indicator will give you an idea of what is going to happen in the future.

A good example of a leading indicator is the value of your sales pipeline, when you expect the orders to arrive and what the payment terms are going to be. Predicting your sales pipeline can be difficult, especially if you are dealing with over-optimistic salespeople. However, getting good at this will help you see potential trouble ahead early, so that you can plan to cope with it.

For a FREE copy of Wow's Sales Pipeline Calculator Spreadsheet, please e-mail info@thewowcompany.com

Set yourself some cash targets

This is not only important, but can be good fun too. Working hard to accumulate cash in the bank requires discipline and focus, and it often all starts with a simple target. Perhaps it is a specific amount of cash you’d like to reach, or it might be based on a formula, e.g. x months of overheads in the bank. Pick something that works for your business.

Here are some simple things that you can do to improve your cashflow. Are you doing all of these?

Planning

• Calculate your business’s burn rate. This is the rate at which the business consumes cash on a monthly basis.
• Identify the timing of major cash outflows within the business i.e. Quarterly VAT bills, installment arrangements, annual HMRC payments, payment plans to major suppliers, etc.
• Monitor your cash regularly, including looking at actual cashflow performance against projections. Using accounting software that has an automatic bank feed will help you stay on top of things – just one place to look. If you’re not using Xero, you can find out more about it if you click here.

Credit Control – managing your clients

• Have a written credit control policy..... and stick to it. If someone hasn’t paid you after a certain number of days, take action. Don’t leave it hoping that it will sort itself out. Debtors are like unruly children. You either provide boundaries and stick to them.... or expect chaos!
• Make your terms clear from the outset – include them in any proposals that you write, so that the customer is clear what they need to pay (and when they need to pay it).
• Ask for deposits before you start work.
• Don’t complete the work/deliver the goods until you've been paid (keep something back as leverage).
• Consider reducing the payment terms on your invoices to ‘7 days’ or ‘by return’. Banks are the ones who should be giving credit at the moment, not small businesses.
• Pre-chase key invoices and build relationships with the purchase ledger departments.
• Take action with bad debts. Negotiate finance terms if you know the customer cannot pay your full debt in one payment. Break it down for them.
• Increase payment options. Encourage customers to pay by online banking, standing order, direct debit or even credit card.
• Monitor the credit-worthiness of your customers (and key suppliers) – check out: www.creditsafe.com
• Consider credit insurance also.

Credit Control – managing your suppliers

• Preserve cash by maximising credit terms from suppliers. If you don’t ask, you won’t get.
• See if you can negotiate monthly payments on larger bills. Speak to your suppliers to see if they’d accept 3 monthly payments by standing order.
• Don’t be afraid to negotiate with HMRC too. If you speak to them BEFORE your tax bill is due, you have a chance of spreading the payments, with minimum interest to pay.

More cashflow tips

• Seek financial advice early if you anticipate cashflow pressure – don’t bury your head in the sand!
• If you hold stock, make sure you are not holding too much of it. Speak to your Accountant about an effective stock control system.
• Build a relationship with your bank manager – help them understand your business so that if you need funding, they are more likely to give it to you.
• Generate more sales – It is much easier to increase your sales from existing customers than it is to find new customers. Make your clients fully aware of the full range of products and services that you provide. The last thing you want is a customer telling you “I didn’t know you did that”. An opportunity (and cash) missed.
• If you need to borrow money, make sure you get a good deal. Your Accountant will be able to advise you on your options and how you can keep your costs down.
• Review your costs. Well worth doing this every 6 months. Are you getting value from your suppliers? Where are the opportunities for savings. Remember the 80/20 rule here. Can you identify the one or two changes that will make the biggest difference?

Click here to find out more about Wow’s Cashflow Forecasting