Have you ever struggled to balance the books? Have you ever struggled to manage the cash in your business?
In our Facebook group we get asked this question all the time. How do small businesses manage their cash flow?
As well as being a popular question I know how hard this can be.
I’ve struggled with it, I’ve been there, I’ve run out of money and I’ve been in businesses where cash flow has been tight.
In this blog I thought I’d share with you some of the things that I went through and how I had to work to improve the cash flow and some of the solutions that I found useful.
You have to plan:
You have to spend time thinking about your cash and thinking ahead. When will I need to pay certain things? We all know when our tax bills are due. We all know when our regular bills are due. The problem we have is we use the money that should be for those bills as working capital. We need to find mechanisms that allow us to save for those known events. When Pip and I had our florist shop, we also had a flat above that generated rental income. We never put that rental income into the business as cash. It always went into a separate account because we knew we had the VAT Bill and we had the tax bill to pay. So even when we were staring down the barrel of a £15000 overdraft that cash was never touched. It remained secure. We left it there because we knew that we didn’t have a choice, we had to pay HMRC.
You need processes:
Think about your processes. In business we do work and in return we get money from our clients. What’s our process for invoicing our clients? They know they’ve got to pay, we need a mechanism to get money out of their bank account and into ours.
I know companies that do ‘work’ and they don’t invoice the client for three to five months. That’s criminal, when you’re trying to manage your cash. If you’re working in a business to business world and you invoice clients do the work, invoice it and have a process to chase those invoices. Have a process that highlights when that invoice is overdue and a process to contact the client and chase the money. And don’t be afraid to do it. They owe you money. Don’t be frightened of picking up the phone. You can be nice and still chase your debts so don’t put it off.
We’re all guilty of this. We spend money. What we don’t always do is really analyze why we spend that money. We get money in and we look at our bank balance and say that’s great I’ve got a lot of money in the account it’s time to buy a new computer. I’m going to go buy that bit of software or I’m going to upgrade my camera because I think it’s going to make better quality videos.
If you’re planning and you’re looking ahead you might realize you that you can’t really do this. The money’s not really there, once you’ve paid all of your bills and have planned properly then you can spend. You need to build cash in your business. Before you ever spend any penny in a business think about how much turnover you have to generate to make the profit to pay for that product.
As an example if you’ve got a business that for every £1000 it turns over it makes a £100 net profit and therefore if you spend a £100 on a new piece of kit you’ve got to turn over £1000 to cover that purchase. A simplistic example, I know, but the question to ask is ‘will that new piece of kit or that new piece of software generate you £1000?’. Business owners get confused, they think it’s about the £100. It’s not it’s about the £1000.
Get your head out of the sand:
Another big problem with cash flow is we put our heads in the sand and we don’t recognize it’s a problem. We try to ignore it, we hope it will go away. It won’t. When we were in our difficult times and when we were looking at it we had a really tough weekend. It was emotionally draining but we had to face into all of those issues and come up with a plan to get us out of it. And that plan wasn’t easy to implement. For us it meant remortgaging. It meant increasing some debt in certain areas to try to pay off loans and reduce our interest rates on others. It meant going without lots of things. It meant cancelling the golf club membership. All that had to go in order to sort out our cashflow. It’s not easy but sometimes you’ve got to do
Look after the pennies:
The pennies matter. It’s an old saying but looking after the pennies matters. If you look after the pennies the pounds will look after themselves. Think about every single penny. If you’re going to go to a client meeting it’s ten miles down the road ask yourself if you really need to drive? Could the meeting be held via Skype, will a phone call work or even just an email because if you can save a couple of pennies on fuel it will all add up and it will improve your cash flow. Challenge everything and look after the pennies.
The final thing I would say in terms of helping with your cash flow is constantly review everything. A great example of this happened to me this morning. I noticed $59 had left my bank account. I thought what on earth is that. Last year I signed up for some software to help me create a podcast. I still haven’t got the podcast live but it was on auto renew. And I missed it. I didn’t see that it was coming up. So now I have the software for another year. On a positive note it’s giving me motivation to get the podcast going. But if I’m not reviewing everything all of the time little things like that can slip through and before you know it that adds up to a few hundred pounds. Make sure that every month when you do in your accounts or when you look at your bank statements ask yourself every month do I still need to be spending that?
With these few tips you can improve the cash flow in your business.
I’d be really interested in your thoughts, if you’ve got any comments or any other top tips please share in the comments.