A few weeks ago I wrote about five traps business need to avoid in order to succeed. In my blog today I want to talk a bit more about one of those particularly insidious traps. I want to talk about cash.
Cash is the lifeblood of any business and the lack of it is the number one reason why businesses fail. When I was studying at university my postgraduate was in entrepreneurial studies. I studies the starting and managing of small businesses. I remember even then being told repeatedly, by those who had successfully started their own businesses, that managing cash flow was the number one issue that all entrepreneurs have to deal with. The hard truth is we either deal with it successfully or we fail.
I thought today I would aim my discussion towards those starting a new business or those who are within the first year of their business life. To that end let’s start with a basic question.
What Is Cash Flow?
The answer to this is actually very simple. There is no mystery, there is no magic. The answer is just that money Flows in and out of any business. You need to have enough cash to pay your outgoings while waiting for your income. Let’s face the truth, people will wait as long as they possibly can before paying you. Why would they do that? Because they have to manage their cash flow too. The hard part is; if you run out of cash your business is finished. This leads us to our second question.
How Do We Keep Our Cash Flow Positive?
Here are five tips to keep the cash flowing in your favour.
- Agree clear payment terms with your customers. Whenever we issue a quote or discuss a project with a client we need to discuss payment. This isn’t an issue that should be left to later. Sometimes we can feel awkward discussing money. We were all taught at school that you don’t discuss salary at a job interview. But I have to say that is just bad practice. When discussing your business with a client you need to be up front about the amount any project will cost and when it will have to be paid. If you have agreed payment terms with your clients you can then plan when you can pay your creditors because you know when your income will arrive.
- Send clear invoices. Your invoice should state clearly when payment is due. You have already agreed this with your client but you should also state it on your invoice. You need then to track your payments received so that you can tell if any invoices become overdue.
- Send invoices promptly. You should always send your invoice as soon as the agreed task is complete. If you agree terms of 14 days from receipt of invoice but you don’t send that invoice for a month after the end of the project you are at fault. If you find yourself unable to meet your own financial commitments it is down to you.
- Make paying easy for your customer. You need to make it as easy as possible for your customer to pay. Do you take cheques? Can they pay by Paypal? Will you give them some account details to make a transfer? The answer should be that all of these options are available. But you should favour bank transfer over the other two as Paypal will charge fees and cheques take time to clear. Those days in clearing are not helping you in managing your cash flow. What do you do when you are dealing with large amounts or a long term project. Have you considered allowing your customers to pay in installments? Perhaps you can arrange a regular amount or arrange to invoice at the end of certain steps in the overall project. This will ease the financial burden on your client and massively improve your cash flow.
- Treat Direct Debit payments as normal. If you can agree payment installment plans with a client then setting up a direct debit is th easiest way for you to ensure that payments are received on time. That is easy for the client and great news for you. Regular income drops into your account at the same time each month and suddenly your financial planning is so much easier.
A Final Thought On Cash Flow
I hope you have found these ideas useful and that you can put some of them into effect straight away. A final point I want to make is about when managing your cash flow goes wrong. Even if you start your business with good cash reserves and have a low geared start up (low debt ratio) allowing payment deadlines to slip is never a good idea. It is very easy for you to find yourself in a position where you have to access your credit facilities just to manage while you are awaiting payment. What you are effectively doing when you do this is paying interest on someone else’s debt.
Don’t pay the interest for bad clients. It can be tricky to balance the desire for good relationships with the need to get paid. This is especially problematic if you have a large and major client. Big companies always set their own terms for payment and ignore yours. BUT don’t be afraid to chase your payment. Be polite but firm and above all, get paid.