Good cashflow, which is the money coming in and out of your organisation at any one time, is the lifeblood of any successful business. Without firm control of it, your business may struggle to survive. As such, maintaining healthy cashflow is vital.
Preparation and understanding
Most cashflow problems can arise from a lack of preparation, particularly if the business is subject to seasonal fluctuations, as can be the case in hospitality or retail. Retail businesses may need to purchase seasonal stock well in advance, and hospitality businesses need to ensure that they have sufficient cashflow to see them through quieter trading periods.
Where possible, rely on any industry trend data, as well as your business’s past performance, so you can forecast what you are likely to need.
If you’re a start-up business without any historic financial data to rely on, you should speak to your accountant or a financial adviser. They should be able to offer expert guidance and advice, as well as assist in the preparation of financial forecasts to help you understand the peaks and troughs in business trading.
However, even with the most robust data, there will inevitably be unforeseen issues to address along the way. It’s when these challenges arise, like the COVID-19 pandemic as an extreme example, that businesses with poor cashflow management can struggle. Wherever possible, you should also seek to build in an element of contingency to cover unforeseen expenditure.
Manage debtors and creditors
This may sound obvious, but making sure you invoice your customers in a timely manner and monitor receipt of payment is a crucial aspect of good cashflow management. While most customers will pay on time, there may be occasions where they struggle to meet a settlement deadline or simply forget to pay. If this happens, it may impact on your working capital funding and create difficulty in you paying your own suppliers.
Open communication with both debtors and creditors will help in managing these situations more effectively.
Acting sooner rather than later
If you foresee any cashflow issues, don’t wait. Speak to your bank or lender as soon as possible to try and create a plan to manage through any periods of pressure.
Borrowing to support cashflow
In some instances, taking on a business loan could give your cash flow a boost. This of course depends on individual circumstances, goals, financial status, and the lending criteria of your lender.
If this is an option, you will need to demonstrate that any loan would be affordable and won’t place your business in financial difficulty. A responsible lender will always ensure that any loan sought can be comfortably serviced.
Be aware however that borrowing may provide a quick fix but may not be the best solution in the longer term. It may be better to seek support and guidance on budget management to help improve cashflow, for example.
With cashflow being so vital to the survival of a business, it can be quite overwhelming if you feel you have no control over it. The points stated above act as the fundamentals to staying on top of your finances, but one size is unlikely to fit all. If you’re concerned about your finances, seek support sooner rather than later to ensure that you maintain a healthy cashflow.