Running your own business can be exciting and rewarding but often presents its fair share of stress. Often called the “silent killer” poor cash flow is one issue that causes more businesses to cease trading than anything else.
If you’re concerned with your cash flow, I’m about to share some practical advice to help you resolve your problems. You’re not alone.
It’s hardly surprising many small-business owners struggle to understand how to manage it. It’s a topic that’s surrounded with many myths and misinformation. This article will debunk these myths and help prevent you from becoming another unfortunate business statistic.
Myth 1: I’m making good profits, so I don’t need to care
If you believe this, I am just about to break some bad news to you. Profit doesn’t equal cash or healthy cash flows!
Your profit and loss statement contains your revenue and expenses. But some of your revenue and expenses won’t reflect when you receive funds and pay expenses. Your profit and loss statement will probably also include non-cash items such as depreciation.
You’ve probably heard that a sale is not a sale until the cash is in the bank account. Until you receive the cash, you’re exposed to potential cash flow problems. Just because you have issued and sent an invoice it’s not time to “count your chickens before they hatch”. Some customers will delay payment (or not pay at all) but you still have payments, such as rent, suppliers, salaries, etc, to pay.
It may take only four or five late payments before you find you have a cash flow problem. You begin to fall behind with your own financial commitments. Keep on top of the cash actually flowing into your bank account and chase overdue payments. If it’s not in our bank, it’s not a sale!
Myth 2: A healthy bank balance is all I need
Many small-business owners hold large cash reserves in their bank accounts for a “rainy day”. Of course, having cash in your bank account may give you a sense of security that you can pay your suppliers on time. Cash is the oxygen that helps businesses “live and breathe”.
It’s likely that these cash reserves aren’t earning interest or keeping pace with inflation. Often cash that’s sitting idle in a bank account isn’t being used as effectively as it could be. Most business owners want to generate higher financial returns than the interest they could earn by simply placing their investment with a bank.
Reinvesting cash back into your business (such as staff, new plant and equipment, stock, etc) is often a good way to develop and grow your business. So, having cash reserves may be the signs you’re doing something right, it’s also important how you manage and spend it.
Myth 3: I am the only one who poor cash flow impacts
A business’ cash flow is its lifeblood. Poor cash flow doesn’t just affect a business’ owner(s). It affects everyone and a business struggling with its cash flow will quickly become noticeable. Staff and rent don’t get paid, suppliers cancel orders or refuse to negotiate credit terms. This is just the start…eventually telephones are disconnected, taxes and other expenses don’t get paid. Staff and the business’ owner dread a “knock at the door”.
Your suppliers can be a major ally for your cash flow. Consider negotiating better credit terms with them and renegotiate periodically. Notify them in advance if you expect to pay them late. They are important and maintaining good relationships with them will help maintain your business’ credit-rating and negotiate better payment terms.
Myth 4: Game-over – my cash flow is so bad it’s the final nail in the coffin
It may certainly be a concern and a wake-up call but it needn’t spell the end. Many businesses can carry on trading over a short-term with a little “tweaking”.
Developing short to medium-term cash flow forecasts will give you a lifeline. Forecasting various scenarios may help you avoid you being in the situation in the first instance. That’s why planning different scenarios is crucial. Determine your worst and best cases.
RELATED ARTICLE: We’ve previously written an article sharing some insights on why it’s important to manage cash flow.
This list is not conclusive. While it includes some basic “hygiene” factors and “street wisdom” small-business owners often overlook them. Our cash flow management coaching service has been developed to identify and treat the underlying causes of poor cash flow. We undertake a thorough review of the key causes, set goals for improvement, and help implement simple strategies to optimise cash flow.
Managing your cash flow, and the associated worries it brings, will give you more time to develop and grow your business.
Please contact one of our Business Advisory Services team to discuss how to implement some good cash flow strategies to help you manage cash flows.