In any business, cash flow is king, and in smaller businesses, cash flow issues can cause particularly severe impacts.
A recent survey from the British Chambers of Commerce (BCC) found that over half of respondents who sought additional finance for their business said cash flow was the main reason.
But the good news is you can manage cash flow better – and so improve it – by adopting just five key habits.
1. Days cash on hand – stay on top of it‘Days cash on hand’ (DCOH) is simply about knowing how many days you have before cash runs out.
This enables you to make informed decisions about which purchases are truly necessary, and which can wait.
You calculate DCOH on the assumption that you will make no new sales. This forces you to err on the side of caution.
The more days cash on hand you have, the bigger your cash flow buffer. Usually, 15 days or more is advisable as a bare minimum, but aim to have at least 45 days’ worth if possible – more if your business is seasonal.
2. Take action on payment terms
One of the most effective cash flow improvers is getting paid for a sale before that sale results in your incurring the costs associated with it.
Prompt billing can help with this, but if you’re dealing with customers who have longer payment terms - 60, 90, or 120 days, for instance - you risk not being paid until months after you’ve incurred the sales costs. This can be a serious threat to your cash flow.
There are two things you can do about this. Firstly, consider renegotiating payment terms with your customers to improve your cash flow situation.
Secondly, when you bring new customers on board, negotiate payment terms up front, and ensure these are clearly reflected in a contract.
You should also collect data on the average number of days it takes each customer to pay, and plan to reduce this figure as much as possible, using methods like automated payment reminders, early payment incentives, and late fees.
3. Keep an eye on the eggs and the basket
In business-speak, ‘customer concentration’ is about how much of your revenue relies on a small number of customers – and it’s critical to cash flow.
If one or two customers are the source of most of your revenue, just one late payment could be devastating for your business. So it’s important to keep a close eye on your customer concentration and take measures to adjust it to make your cash flow more resilient.
Selling more to existing (other) customers, expanding and diversifying your customer base, and moving the biggest ‘eggs’ in the ‘basket’ onto shorter payment terms, to help minimise the impact of late settlement, all qualify as cash flow improvers in this scenario.
4. Slow your cash outflow
Although paying your suppliers promptly maintains positive relationships with them, and also protects your credit rating, in reality it may be worth delaying payment a little, as this will reduce financial outflow from your business, and improve your cash flow.
If you have 30 days to pay, for example. consider paying on day 28. This gives you a chance to bank more money before you have to spend it, creating a bigger cash buffer.
5. Be the early bird with the lendersThe old adage about a bank lending you money if you can prove you don’t need it is absolutely true.
Trying to secure a loan in hard times will either result in a refusal or high rates of interest. Better to engage with lenders early, and request credit – e.g. an overdraft or a business credit card – when the business is performing well, as this will positively influence their decision.
Plus, with these forms of credit you pay no interest unless you actually dip into them, so they’re a waiting cash flow boost with little or no associated expense.
More tips to improve your cash flow
Securing external finance is also a way of improving cash flow, and we’ve put together a helpful introduction to our Finance Finder service to help.
This connects you to grants and other additional cash for your business, saving you time, effort, and stress in the process.
After all, whilst cash flow is king, you’re the boss – and your time costs money too.
For more information on how to join Bedfordshire Chamber of Commerce, visit www.chamber-business.com, or call our friendly team on 01582 522448.