Cash flow matters. There’s no getting around it. Whether it’s supporting a business, sustaining growth or stimulating product development, cash flow is king. In fact, research has found that 90 per cent of small businesses have closed up shop because of cash flow problems, so it’s important to keep those dollars rolling in as fast as possible and out as slow as possible.
So what can you do to avoid cash flow surprises? Let’s talk money and sense.
#1. Profit doesn’t equal cash flow
You business may be generating revenue but once you cover costs, salaries, taxes and expenses, how much is left? Keeping your costs as low as possible and being strategic about reinvesting profits back into the business will help keep cash flow available and flexible and reduce the possibilities of it becoming comprised when you need it most.
#2. Forecast your cash flow
Cash flow refers to when a business needs money, and profitable businesses are just as likely to fail for cash flow reasons as unprofitable ones if the money isn’t there when it’s needed. Forecast when cash will come in and when cash will go out and do what you can to make sure it’s available when you need it, including mitigating any potential surprises.
#3. Get it in the bank
Your revenue might look great on paper but it doesn’t equal cash flow until it actually hits your bank account. And if bills are due beforehand, it can make for a cash flow problem, albeit short term. So hand in hand with forecasting your cash flow is the need to generate your invoices so you get the cash in the bank.
#4. Seasons change
Seasonality can have a big impact on cash flow and the need to plan ahead. Maybe your clients close down over Christmas or you deliver a service only in winter, whatever the reason it’s important to analyse trends in order to forecast your ingoings and outgoings and ensure your business is sustainable throughout the year. This will also help you manage stock, staff and cash flow accordingly.
#5. Expect the unexpected
Emergencies (illness, injury, family issues, loss of staff) and unexpected expenses are all obstacles you may need to contend with at some point, but should plan for at all points. They can affect your cash flow and/or your ability to operate your business, so try keep something in reserve, whether it’s a financial cushion, succession plan, business insurance or adaptable staff.
#6. Invoice, collect, repeat
Aiming for a steady stream of cash flow will help the smooth operation of your business. It’s important to set clear and professional payment terms with your clients from the outset so you both aware of what to expect. Establish a policy that covers all aspects of invoicing and collections, including your rate structure, invoice frequency, payment terms, late-payment penalties, payment methods and the process you’ll follow for late and missed payments. Prompt invoicing and prompt payments keep the dollars rolling in, so establish your invoicing routine and expectations from the very beginning of a client relationship.
#7. Prepare for growth
The goal of most startups is growth, but you need to do more than just plan it, you need to prepare for it. While there are lots of costs that come with growth – inventory, staff, marketing, equipment –forecasting your finances and earmarking your cash for growth can help ensure it’s there when it’s needed.
For any further information about our cash flow and avoiding killer surprises, talk to the team at Parallel VC / Desk Space or ask us for any other advice or recommendations.