Cash flow is about how much cash you can lay your hands on at any time. You may have made 200% profit on the goods you have supplied but it only affects your cash flow when you have the money in your hand.
Cash flow problems kill many start-up businesses, particularly those that are selling to other businesses.
All businesses put off paying bills as long as they can so that their own cash flow is better. Your sales to other businesses carry two risks:
- That the business may go bust and never pay you, meaning you could go bust too if it is a large invoice
- That payments of your invoices will be delayed, meaning your available cash is reduced
How to Avoid Cash Flow Problems
1. Market Your Services or Products to Consumers
Consumers expect to pay for their goods or services immediately, in cash. Your risk is reduced to almost zero. If consumers do not pay cash then they do not get the goods and you can sell them to someone else. If your business is a service-based one then ensure that you are paid frequently so your risk is reduced to the hours that you worked on a job.
If you do sell to other businesses then be very careful about the credit terms you extend. If you offer a discount for prompt payment you will find your invoices are paid sooner, just factor the discount into the price you quote in the first place.
2. Ask for Cash
Expect to be paid in cash immediately rather than in favors or goods; you can only pay your own bills with cash.
3. Keep Records
Look up how much cash you had at the end of each of the past six months. In a healthy business this amount of available cash will show an increasing trend, this is called positive cash flow. If the amounts are getting smaller then you have negative cash flow and a problem that you need to get a hold of.
4. Plan Ahead
You know when your tax bills are due. Make sure that you have enough cash on hand to pay them. If you spend every cent that comes in and have nothing left for the government, your business will soon be at an end. Work with an accountant to predict your tax liability.
5. Delay Your Own Payments
If an invoice says payment due in 21 days NEVER pay it immediately. The extra cash sits in your pocket for that 21 day period and increases your liquidity, possibly preventing you from going into the red.
6. Invoice Factoring
This is where you sell your invoices to a bank. Usually you get around 75% of the invoice amount immediately and another 10-20% when the invoice is paid. The bank takes a small cut for providing the service and carrying the risk.
You can factor all your invoices or just the ones that are proving troublesome to collect on. Overdue invoices carry a larger risk for the bank, so you will have to pay more if you only use a factoring service for invoices that are overdue.