Keep it flowing - the importance of managing cash flow in your business
Kate Clarke - Xero Certified
Helps Scaling Founders professionalise their finance teams || Goldman Sachs 10KSB Alumni || Qualified Accountant || CFO & Finance Director Headhunter
Any business can run into difficulties without consistent and effective systems in place for managing cash flow. Without cash, your business is in danger of failing – even if it’s profitable, growing fast, or even the market leader.
Cash is the lifeblood of business and without it, businesses fail quickly. So it’s vital that you manage your cash flow carefully.
Managing cash flow effectively is all about having a good understanding of your business’s income and expenditure – not just a snapshot of the cash situation right now, at this moment, but forecast ahead for at least 3 months, and ideally a year or more.
One mistake that many small businesses make, is to base their cash flow forecast on the date that income is due, rather than the date they are likely to actually receive payment. If you have a client who routinely pays slowly, or even late, it makes sense to forecast receipt of their payment when it’s actually likely to hit your bank account, rather than when it falls due. (It also makes sense to find a way to encourage them to pay in a more timely manner – something a strong Finance Director will be able to manage.)
Common causes of Cash Flow issues
There can be any number of reasons why a business might suffer from cash flow problems, aside from slow-paying customers, including:
- Having fixed costs within the business that are unsustainably high,
- Setting your prices too low,
- Offering payment terms to clients that are over-generous,
- Having low sales levels,
- Receiving inflexible or onerous payment terms from your suppliers
An experienced Finance Director will identify the specific set of issues that are adversely affecting cash flow in your business, and then introduce a range of strategies and systems to fix those issues as a matter of priority. This may include encouraging timely payment from clients by introducing an incentive scheme for early payment, along with penalties for late payment, renegotiating terms with clients and suppliers, helping drive sales through discounts, and restructuring the sales cycle, or raising prices.
Prevention is better than cure
Once the immediate threats have been fixed, your Finance Director will then install a set of systems and processes to ensure greater oversight and control of cash flow in the future, to prevent these, or similar, issues arising in the future. The most successful cash flow management systems are ‘baked into’ the fabric and structure of the business, and become a fully integrated part of ‘how we operate’ so that any potential issues or pressure points can be identified and fixed long before they become problematic.
Having strong cash flow management processes in place will give the leadership team access to regular, robust cash flow reporting that they can rely on to inform strategic decision-making, such as if, or when, to expand, or hire more staff, whether to move premises or source new suppliers, and if the time is right to invest in developing new products or launching into new markets.
As managing cash flow is so crucial to the long term survival and growth of your business, it makes sense to get an experienced Finance Director on board to ensure full oversight and control of your cash. And in keeping with the spirit of controlling cash flow and keeping costs down, there’s every reason to hire that FD on a part time basis, giving you access to all the relevant expertise and skills required, at a fraction of the cost of having a full time permanent FD.
This article was first published on the Artemis Clarke website.
Find out more about how a part time FD could benefit your business by getting in touch here on LinkedIn or via our website:
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4 年Great advice Kate. I've been involved with the implementation of many cash management / forecasting systems, and found that the most efficient systems were designed around or complimented by the thinking of FD's that know how to think about cash. One of the best things I've heard is when a particular FD told me ..."You should manage a business for cash, not for profit".
I provide asset and working capital finance to SME businesses via a funding panel with an appetite to lend.
4 年Credit is getting tighter, businesses would be advised to manage and forecast cash more diligently. This will be evident through restrictions on trade credit as well as from conventional borrowing, so even perceived "non borrowers" will not be immune.
Fractional Finance Director | Know Where Your Profit Is Made | Business Planning | Profit & Cash Improvement | Strategy
4 年Great article Kate. Knowing what is going on in your business and how that is going to affect cashflow is always important, in the current economic climate even more so. #CashIsKing
''Giving families better protection than is possible with just a Will''
4 年Love this article. Prevention is better than cure is so accurate. Hope all is well AE
Financial Management * Taxation * Due Diligence * Risk Assessment * Information Systems * Research
4 年Kate – the issues you raise are exactly to the point, it cannot be understated just how critical a cash flow forecast/budget is to any Organization be it Profit or Non-Profit.?It is so easy for any Organization to find itself in dire straits for failing to constantly monitor the cash flow budget and make adjustments as required. ?If only all business could operate on a basis of cash sales, but alas this isn’t the case, although those that have managed to stay afloat over the past few months would probably count themselves very fortunate. So, get the cash inflow right and the rest just falls into place.