When you’re just starting out, it’s tempting to view all of your income as profit. But as the old adage says, cash is king. Keeping some money liquid can help your business in several ways. So how do you manage your cash flow and what are the golden rules for keeping a healthy bank balance?
Why is cash so important?
Over 70% of small businesses had to deal with late payments in 2013-14, according to the Federation of Small Businesses. It’s important to have some money available at short notice should any problems arise. There are many reasons why you may suddenly need available cash. They include:
Getting the right Balance
The main rule for getting cash flow right is to make sure that there is more coming in than going out. This might sound obvious, but for many new business owners, finding this balance can be difficult. If you can, try to have some cash stored in an easily accessible savings account. This way, you will be able to cover any months where you do not make as much income as anticipated. Keeping your accounting in good order will help you to understand your income and outgoings. If your records are in order, you will be able to identify and respond to problems quickly.
Staying on top of your income
For money coming in, the rule is to get paid as quickly as possible. Make it easy for your clients to pay you and make sure you set up clear terms of payment. Negotiate a favourable payment term as soon as you secure new clients and make sure that invoices go out on time. Keep a good record of what income you are expecting and when. If payments are late, chase them immediately.
It helps if you can forecast your income. To do this, look at the income for previous weeks or months and see if you can see patterns emerging. From this data, make a conservative forecast of how much you expect to make in the next year. If you can forecast your expected income it means you can start to plan ahead and make sensible decisions about outgoings and expenses.
Warning signs that your cash flow is not healthy
If you have set up your financial forecasts well then they will give you a good indicator if you are falling behind. Check this year’s income against your income from previous years and keep accurate financial records so that you can see any warning signs quickly.
If you are going into debt that is a sure sign that you need to adjust your planning. This is not solely about cutting back, however; you may just need to reallocate spend. Don’t be afraid to ask your suppliers for discounts. And don’t neglect your marketing efforts; you still want to keep cash coming in.