Our previous blog post discussed the basics of cash flow management – the process of making sure that your business always has cash to cover its expenses.
The idea of balancing income and expenses may seem really simple, but implementing the strategy in your business is not always that easy – in this article we take a look at the challenges of cash flow management in a small business and provide some solutions for entrepreneurs.
Why is balancing your cash flow so challenging?
Most entrepreneurs, especially new business owners, find it difficult to keep their cash flow positive from time to time. Usually this happens for a very simple reason: business expenses are due for payment at a time when one or more clients haven’t paid their accounts.
Looking at cash flow from this angle, the reason why so many SMEs have cash flow problems becomes clearer – the key to planning your cash flow is a matter of timing your payments so that there is always cash on hand. This may be a logical conclusion, but like so many things in life it’s easier said than done. Let’s look at a few strategies that will help you achieve a balanced cash flow.
How to time your payments for success
“Clients never want to pay, and suppliers never want to wait”
This sentence sums up the challenge of cash flow management – but it’s a challenge that can be overcome. Here are a few tips for timing your payments more effectively.
- Get big clients to pay on the 25th – if possible, insert a payment clause into your contract or service level agreement that requires clients to pay by the 25th of the month – even if they pay on 30 days.
- Pay suppliers on 30 days, or on the 15th of the following month – this will give you a period of two to four weeks to ensure that clients have paid, keeping your cash flow positive.
- Reserve funds for future payments – the flip side of paying your suppliers 15 or 30 days after they have rendered a service is ensuring that you keep the funds aside and don’t spend them on anything else. This is also known as earmarking the funds for future payment.
- Pay yourself last – unfortunately, you can only pay yourself out once all your business expenses have been paid. Putting off payments creates negative feelings from clients and employees, adding to your stress levels and affecting your company’s reputation.
Having a cash reserve or overdraft facility
Every business needs an emergency supply of cash for situations when clients don’t pay or emergency expenses come up – as long as you only use these funds for genuine cash flow emergencies.
The discipline of cash flow management
If you have a tendency to spend money as soon as it lands in the bank – and this is a very common impulse for many people – you may need to appoint one of your business partners or a financial manager to handle payments. You can also reserve funds for future payments using your internet banking application, keeping the funds aside with no risk of them being spent.
To find out more about cash flow management or to set up a planning session, contact Northwood today. Our team is on hand to answer all your queries.