A common misconception is that great profits mean you have a healthy business. Yes, profits are what you are aiming for but cash flow is what will get you there. Another common misconception is that small businesses can’t learn much from the corporate giants. “After all,” you might say, “the big boys don’t have to play by the same rules that we do.” The big-box chains of the world may seem like they have unlimited funds but most don’t – just ask Sears as it closes its last store at the end of this year. Large or small, the name of the game is working capital. More has to come in than goes out over the long term or your doors will shut, eventually.
Here are three crucial tips for assuring small business cash flow:
1. Set cash flow targets
Andrew Johnson, financial controller for PowWowNow, advises that every business should maintain a cash flow forecast. He suggests it be updated on a weekly basis for a business owner to have a realistic outlook of what to expect in the following six to 12 months.
According to Johnson: “Setting targets for the credit controllers is an excellent way to ensure it is given the attention necessary and provides a level of satisfaction and ownership to hit and beat these.”
2. Agree to clear payment terms
Suzannah Nichol of National Specialist Construction Council says establishing clear payments upfront is vital. She warns that you must make your payment terms clear from the outset, otherwise payment will become more and more unreliable and unclear. “If you don’t know when a payment is overdue, how are you going to manage your cash flow?” she says. Nichol believes in the 30-day payment rule. She says it is just good business practice to pay within 30 days. Your employees should be paid within that 30-day window and you should pay your suppliers in the same manner.
3. Focus on cash flow so your business avoids being cash poor
The ready availability of cash often makes or breaks an organization. One study shows that 82 percent of businesses fail because of poor cash flow management.
If you need help to manage cash flow, we can help. At LVRG, we offer guidance in small business funding by providing working capital flow solutions. Profits are important, but no business can survive without positive cash flow.