Running your own business is no easy feat. Every day new problems arise that make things more difficult but there is one extremely common issue that can bring down even the most successful companies.
No matter how much money your business makes, the amount of money you have to spend (whether cash and/or overdraft facility) needs to be more than your outgoings to make payments when due. Being unable to pay suppliers, employees and creditors is any business owner’s worst nightmare.
Poor cashflow can have a number of other knock-on effects on your company. It can even spell the end of your business altogether.
It can adversely affect business relationships
Consistently late payments cause tension between you and your suppliers. They have their own overheads to pay and you may be causing them cashflow problems of their own. This can have a very negative impact on your relationship – they may even walk away from supplying you.
It can impair your credit rating
Falling behind on payments can lead to borrowing to cover shortfalls which, through repayments, only adds to your monthly fixed costs which may be squeezed enough already.
Late supplier payments are often recorded by credit reference agencies which can negatively impact your business’s credit rating, greatly impacting on your ability to be accepted for credit accounts and other finance facilities in the future.
Slowed or stopped company growth
Poor cash flow means your company will be unable to hire new staff, fund new strategies, or invest in important assets such as new equipment and stock. Staff may be keen for personal and professional growth through the expansion of your business and keeping them waiting may make the grass look greener for them at other companies.
Lost edge in the market
We business owners are always looking for ways to improve and modernise what we do. New and better methods are developed all the time as well as advancements in the technology we use. Lack of cash can mean that your products and services can’t be developed and improved at the speed of your competitors.
Can you stop this from happening?
There is no use in blaming an upward chain for your cashflow issues. It might be true but it doesn’t get you anywhere.
Yes, you will struggle to pay your bills if you have not received your own payment from customers. But there are things you can do to stabilise your business and make sure you don’t lose any money.
By taking charge over the problems your business is experiencing, you can begin to regain control of the situation.
Forecasting cashflow is an incredibly useful thing to do to help you run your business and make sure you don’t run out of money.
Create a two-month rolling forecast to determine whether it’s likely that you will be able to meet all of your bills. This gives you time to make changes to rein back on spending if you need to so the chances of going past due date with your suppliers diminish.
Here’s how to create your forecast:
Work out what kind of cashflow you have
If you receive payments from customers every day or every other day, you have what is known as a smooth cashflow. This is usually the case for companies that deal in more simple goods and services with a low order value. The money comes in in a steady, constant stream throughout the month.
A lumpy cashflow is when you are paid in a lump sum by your clients. This usually happens when you provide large-scale, complex goods or services that have a higher order value. You can go days or weeks without any incoming cash
If it’s smooth, take all the cash you made in the last two months and divide that number by 60. Using this number, you can estimate how much you will have in your account on a near-daily basis.
Try to know exactly how much each of your bills will be and when they are due. You can then work out if you will have enough money for each expense as it comes.
If your cashflow is lumpy, make sure you always know:
- When your next project is,
- How much it will pay,
- What bills, suppliers and other expenses you will need to cover until then,
- When you will receive payment on current and existing projects,
- How likely it is the customer will pay on time, and
- If it will be enough to cover your expenses until the project after that.
Once you know all of this, you can work out how much cash you will have available to pay bills, wages, and more when they become due.
Chase up on invoices and payments
Some customers just always pay late.
They may have very good reasons, but that doesn’t make things any easier for you or your suppliers.
You can make things faster on your end by always getting your invoices out as soon as possible. It can be very uncomfortable chasing up a customer on their late payment, so make sure your terms of payment are very clear.
Make things easier for yourself and your customers
Consider all types and methods of payment so your client can pay in a way that works for them. It may mean waiting a few days for a cheque or accepting a credit card for the first time, but adapting for your customer can speed up the process overall and mean they are more likely to return.
You could also offer incentives for customers to settle their invoices quickly. Discounts for early payments could reduce late payments considerably.
If it works for you, talk to your customer about multi-stage payments when working on a time-consuming job. If they’re currently dealing with their own cashflow problems, this option could really help them too.
Talk to an expert
Other than running out of money, the second worst nightmare scenario is that you may be forced to inject additional funds into your company by using your own personal savings. And it makes sense to try not to take additional borrowing out.
If cash flow is worrying you, talk to Smart Team. We’ve helped businesses at all parts of their lifecycles – start-up, growth, decline, temporary slump, flush with cash, and so on. And we’ve found the right solution for them all.
Please call us on 01202 577500 or email us at firstname.lastname@example.org