Managing cashflow in small businesses
Managing cashflow is vital for small businesses to survive. For those new to business, or perhaps those looking to start up in business, cashflow is basically the movement of cash in and out of your business and it’s one of the most important aspects of running a small business. The ideal position is always to be ‘cashflow positive’ – this is when the the costs of a particular service or product that you have delivered are due after you’ve been paid, for example, you buy 20 widgets and agree with your supplier that you can pay them 30 days later, the next day you sell all 20 widgets to a customer who agrees to pay you 10 days later – the result is you’re cashflow positive, the cash from your customer is in the bank before you owe your supplier and everyone is happy. Unfortunately, the chances of this happening in the real world are very slim – so what can you do about it?
Cashflow forecasting for small businesses
The key to managing cashflow in a small business is forecasting – knowing what cash you need, before you need it. A lot of the costs associated with running a business are what are classed as overheads, or fixed costs, which you will need to pay out regardless of how much work you’re actually doing. Typical overheads include wages, insurance, rent and transport and these will generally be fixed amounts paid on the same date each month. The variable costs are harder to account for, but need to be carefully planned so that you can keep as much cash in your business as possible to make sure that you can pay your bills on time.
On a very basic level, which is enough for most small businesses, a simple spreadsheet is enough to manage cashflow. Set up a column for each month and list your fixed costs for each month, broken down line by line. Next, list your variable costs, such as suppliers bills, and put the amount you expect to pay in the months when you need to pay it (not the month you recieve the invoice, but when the invoice needs to be paid).
So far you should have captured all of the costs involved in running your business, next you need to predict your sales each month and list them below the costs. This is the bit where it helps to be honest – be realistic about what you can achieve, base it on previous experience (the previous 12 months sales, for example) or if you have nothing to base it on, think long and hard about what is realistic.
What you have just created is a basic cashflow model – take your cost of sales away from the value of sales and you have your cashflow figure for each month, either positive or negative. This shows how much cash you should have in the bank each month and the value of credit facilities you’ll need to get through the months when you’re cash negative.
Take a look below for an example of a simple cashflow forecast.
A basic cashflow forecast
How to improve small business cashflow
The basic rule for improving cashflow is to be paid before you need to pay. In the current climate, it’s not always possible to achieve this, but the closer you can get the better.
1. If your work is mainly for other businesses, you can try to negotiate shorter payment terms with your customers, even knocking 5 days of a standard 30 days is worthwhile, you could also look at ‘invoice factoring’ whereby a bank will lend you money on the basis of your outstanding invoices.
2. Whether you sell to other businesses or the general public, you also need to talk to your suppliers and get the maximum payment terms available – again, an extra 10 days might not seem like much, but it all adds up.
3. If you hold stock for sale, keep the minimum amount on the shelf that you need – having stock sat on a shelf after it’s paid for is all cash that you can’t get access to and it could be the downfall of your business when times are hard – it’s no use having shelves full of goods all paid for if you don’t have the cash to pay staff wages at the end of the month.
4. Finally, it might sound obvious, but be careful who you do business with, both suppliers and customers can cause havoc with your business if they fold during a transaction – a quick credit check should make things clearer.
The most important thing about managing cashflow is keep on top of it. Update your forecast when new information becomes available, chase customers for payment as soon as it’s due, pay your bills on time and keep pushing for longer payment terms. Spending some time thinking and acting on what you know could transform your business and keep you in the black when others are struggling to survive.
Tags: business start-ups, information management, management information systems, small business management
Sometimes it’s better to offer a cash discount to your customers to encourage quicker payment of invoices instead of using the invoice factoring method. Some merchant bankers are ruthless in chasing debts and this can damage your relationship with your customers.
[...] Managing cashflow [...]
Having a system in place to manage cash flow is key. A lot of this has to deal with mindset as well. If the business owner has an issue with money, they will not have a smooth cash flow coming in, as their issues will get in the way. A solid system can help with that, but it isn’t all. If possible, it would be best to hire someone else to deal with the cash flow… in a perfect world though eh? LOL!
[...] Business basics – managing cashflow [...]
There are two fundamental goals at the heart of improving your cash flow: control your expenditure and regulate your income.
I believe the best way to manage cash flow is to plan and forecast your future in terms of income and expenses. When you will have a proper system of cash flow, it will be quite easy to distinguish to record expenses and forecast the cash flow at the end of any term.
I enjoyed your blog, thanks for posting.
I also agree with forecasting the future and to plan incomes and expenses. also, a key to sucess is having a strict control of your expenses. Also very important thing is to think that you´re managing a star-up therefore, you need your clients to pay you as fast as possible, you need the cash to keep on going.
You have delivered the details perfectly with a sheet. That’s helpful. Actually I am also running several small businesses, and have no time to look into this matter. I have kept a skilled person for this job. But after reading your article I guess I should look into the matter and maximize business profit.
Thanks again.
Helen
good posting.. i like this posting
regard
@ Elliptical Machines,
Yes,
Income and expenses always gives us path to manage cash flow, but the points mentioned on the actual article is also making sense. I would say, not just following the four major points specified on this article. But many ways matters in terms of making money through small business. Here is the site I would recommend people go learn through the video on how to become expert on stock market brokerage.
Interesting, thanks for sharing!
I agree – cash flow management is key factor.
We are business cards manufacturer company from Estonia and we had to use cash flow management from our local Bank and now we have no problems with cash money.
Yes I agree knowing what cash you need, before you need it.
you should monitor all your cashflow and better us software for convenience.
thank you for the post i did enjoy reading informative post like this one…
So nice of you for posting this good tool.
I think smart cash flow business strategies help conserve valuable cash and make it last through the hard initial period.
If you have to, you can always sell your receivables. You’d have to sell them at a discount, but it gets you cash right away and leaves the collections to someone else.
it’s not that hard managing your cashflow, all you need to do is to balance what goes out and what goes in. You can have like a balance sheet that could summarize every activities that you have in terms of monetary value
Designing a business cash management system to keep track of all your business expenses and cash flow, will maximize your cash on hand and needed for business growth. I agree that a good estimate of income and costs is essential, as well as a “rainy day” fund.