Cash flow - the deadly assassin

Cash flow is defined by 'Google' as 'the total amount of money being transferred into and out of a business, especially as affecting liquidity.' and it represents a significant problem when even the most profitable business has no money to be able to meet everyday business expenses.

This is very much a 'back to basics' article about cash flow but I would encourage you to understand the fundamental difference between cash and profit. For more information on this Informi have a great article.

Cash flow can be used for operating expenses (day to day running of a business), investing (over the longer term), or to allow you to finance projects, plans or new ventures.

For small businesses and specifically those that are start-ups cash flow is such an important consideration and it posses a real problem and this article goes some way to explain why so many businesses don't survive. The key to keeping on top of this is planning to monitor.

According to the Office of National Statistics (ONS), small business survival rates are as high as 91% after one year of trading in some industries but fast-forward five years and just 40% small businesses are still trading. This was taken from an article by Accounts + Legal.

Apart from the obvious and ultimate failure of a business, other implications of not keeping on top of your cash flow may mean that you as a business owner may have to seek out business finance. Having to take out unnecessary business finance, which attracts interest meaning that your finances may be stretched even further over the longer term may not always be the right option, but maybe a result of not planning properly.

You may also find that you carry too much stock, stationery, or supplies. This is essentially an investment in the business but can have a negative effect over the short to medium term. You may wish to consider applying a 'Just in time' ordering system which can mean you can still meet your obligations but have better cashflow when it may be needed.

Offering payment terms also has the potential to cause problems with cash flow. I accept that it's common-place to allow terms for example - 14 days for the payment to be made, but in many cases, these payments/invoices need to be tracked and chased.

I have seen many cases where poor monitoring of money owed within well-established businesses result over the longer term in figures being written off as bad debts.

It's better to have systems and processes in place to monitor and manage this and a great way to do this is through the use of a CRM system. A CRM system for those that don't know is a 'Customer Relationship Management' platform and these allow you to manage relationships with clients and set 'tasks' to chase invoices, or better still send out reminders to your customers/clients. Having a system which makes it super easy to take payments from clients also helps.

There are a number of steps you can take to better your cashflow:

• Draw up a cash flow forecast or implement management accounts to help you forecast what will be needed and what is available. This is a planning tool.
• Implement systems/ better systems to allow you to track outstanding payments and to be able to chase payments when they are due.
• Use systems like 'just in time' for the ordering of stationery, stock or supplies.
• Don't be rigid. Look at your product/service portfolio and identify where you might be able to alter this to benefit the business over the short term. By way of an example, in the estate planning industry, you can receive commissions for introducing products which help your client by pre-paying (funeral plans/probate plans) rather than waiting until the time of need. Your commissions can be received a lot sooner (at no detriment to the client) meaning your cash flow situation is better.
• Ensure your payment terms are on invoices. Follow up when payment is due and make it as easy as possible for clients or customers to pay you.
• Consider offering discounts for prompt payment. I've seen businesses that offer a 10% discount if payment is received within 7 days. Not ideal to offer 10% discount, but better than writing off money that is owed and never chased.

What's your view. What stresses are placed on your business? What does your cash flow position look like? What changes can you make to better your position? If you would like to chat about this in more detail then let's have a discussion.

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