There is a well known phrase ‘Turnover is vanity, profit is sanity, but cash flow is king’. While having all three in a business is a real sign of success its true that profitable businesses can run out of cash and fail. A term we call ‘overtrading’. Given cashflow can make or break a business its important to keep it constantly under review. Here are 7 key aspects of cashflow control.
- Set cashflow targets
One way of controlling cashflow is by preparing and maintaining a cashflow forecast. This is a powerful visual representation of cash movements and shows peaks and troughs. Its one of the most important documents we can produce for our clients.
- Agree clear payment terms
Establishing clear payment terms from the outset is important. Trying to collect cash quickly hinges on there being a very clear idea of what is expected from your customer when they buy from you.
- Invoice quickly
As soon as you sell your goods or services invoice for them. If you wait two weeks after the work has been complete, then it is fairly obvious that it will take a further two weeks before that cash arrives in your bank account. Depending on the nature of your business some payment in advance is often advised.
- Make payments easy for customers
Making payments should be made as easy as possible for your customer. We offer our own clients various ways to pay us but the most popular is now via a direct debit monthly fee option. Its set up online easily and clients like the automation.
- Use technology to manage cashflow
Technology can make it much easier to manage cashflow. Cloud-based online accounting is a real winner. Here is a quote from a client in the healthcare sector ‘Not only has cloud based accounting given me flexibility on where I can view my accounts, but it has also removed the worrying hassle of backing up all that data. I can now view my accounts on the move via my laptop, tablet or mobile phone and keep up to date with my financial situation’.
- Do not focus on profit, focus on cashflow
‘Profitable work is often the worst paying’ said one of my clients. Don’t be blinded by profit margins. I would encourage young businesses to work with reliable, quick-paying clients initially, even if it means smaller clients and slimmer profits margins.
- Keep your bank informed
Last minute requests for an overdraft can be fatal. Let them know well in advance if you are going to need some help. As Bob Hope once said ‘A bank is a place that will lend you money if you can prove you don’t need it’!
