Cash flow problems are a worry for many small businesses, but the real trick is in identifying them before they’ve even happened. If you can do this, you can overcome it before it even becomes a threat to your business.
The main cause of cash flow problems not being caught early is simply that the business isn’t using a sufficient forecasting technique. Many businesses set a budget, but they don’t forecast what money is going in and coming out in future. A good place to start is your cash flow history – take a look through your accounts and put them in order. What were your major expenses over the last few years? This will help you to see where issues might occur, and it can also act as a basis for your future cash flow projections.
Make sure that you know when money is being paid out, but also when you expect it to come back in. For example, when do you have to pay suppliers, and when do you expect customers to pay you? A regularly updated forecast should allow you to see which areas of your business are costing you money, and which areas could have their income increased or allocated in a different way.
It’s worth using some caution here – don’t be tempted to change lots of things straight away. Before you alter the way cash is used within your business, think about how changing one aspect might affect another down the line. It’s a good idea to talk to any employees involved in the area in question, to ask them why a particular cash flow issue exists. There may be a good reason, and working out a way to solve the problem together is better than just changing things without consultation.
If a cash flow issue is being caused by customers taking a long time to pay, rather than internal issues, you may not want to do anything to inconvenience them, especially if your business relies on them. You can ask their opinion and work together to solve the issue, or you could look at using their invoices to release cash through a service like factoring or invoice discounting.
Invoice financing, or indeed a more traditional bank loan, can be a good way to improve your cash flow. Invoice finance in particular is very flexible and, secured against your invoices, the facility grows as your business does. It’s worth researching the options available, and remembering that planning ahead is far better than waiting for a problem to arise!