Introduction
The pandemic and now the current economy has made cash flow a huge issue. As a small business, we have limited resilience, when facing such unforeseen pressures. So we need to get our businesses in order so that we are as lean and efficient as possible. This should be our normal state of operating.
Common reasons for cash flow problems
Some common causes of cash flow are:
- No cash flow forecast
- Inaccurate sales forecast
- Unpaid or late invoices
- Overspending in the start-up phase
- Insufficient cash for emergencies
Cash flow forecast
Every business needs to know what they are spending and what cash is coming in, weekly, monthly and annually. The period is determined by the business need and information available. The more detailed a forecast needs to be, the shorter-term it will be. So, for example a short-term forecast may be a daily one for a total of two weeks into the future. A medium-term one may be weekly and look at a 13-week period. Remember, this is a forecast and so does not need to be accurate to the penny. However, it needs to be as comprehensive as possible, so you can plan accordingly, for example, buying items of equipment or recruiting more staff in the future. If a business does not have a cash flow forecast or does not use one, then it is likely they will fall into cash flow problems. It is like driving to a new place without a map.
Sales forecast
Use previous sales figures, where possible, to complete a meaningful sales forecast. If you are a start-up and do not have access to actual figures, make sure you have detailed assumptions and access to industry data where possible. Make your sales forecast model for sensitivities, such as seasonal fluctuations, disaster recovery, economic downturn due to events such as Brexit and COVID-19. Recent circumstances have shown how unstable conditions can get, and so modelling as many scenarios as possible is critical, with the worst-case scenarios mitigated against.
Payment collection
Once an invoice has been issued to the customer, it is critical to collect the payment by the due date. So, having a late payment policy that customers are aware of upfront, is important. If your customers do not pay you on time, you will eventually face cash flow problems. Have a late payment fee based on the number of overdue days from the payment due date. Set an internal process, with early payment discounts to incentivise customers to pay quickly, sending out reminder letters before the due date and in the worst-case, selling your debt to debt factoring agencies. You may also consider looking into automating this process to reduce your time spent on non-value adding tasks, when you could be spending time increasing sales by networking and winning new contracts for the business.
Start-up phase spend
Understand what is critical to the business. Business owners can get swept up in the excitement of a new venture and spend the investment on the best equipment, marketing and promotional items. Without dampening your enthusiasm too much, it is advisable to sort out a list of essentials that the business will need. Prioritise and shop around for the best deals for the big items. Make sure the requirements meet the business needs. If a £1,000 computer will meet the business needs, then is it worth spending £2,500 on a better model because it is out there? Will you have used those additional features enough to justify the extra spend? Being prudent now will be a boon for later. Especially, when the business faces a downturn and you have enough contingency funds to pull the business through the dark phase.
Cash buffer
This is a cash reserve for the business to tap into in cases of a crisis or for business growth. The question is how much should you have? This depends on the business and its known expenses. Work out how much you must pay for employee salaries, rent, loan repayments and utilities, for example. How quickly does your income arrive? How do your customers pay you? Must you wait 30 days for payment, for example, or is it straight away at the till? You will also, need to factor in the seasonal fluctuations. Set funds aside for the “down times”, especially if you have an idea of when these potentially occur. You will also, need to factor in funds for unforeseen disasters, such as a pandemic, the property burning down or flooding. There is no exact answer to this, but consider all the factors and your attitude to risk taking. You can then come up with a number you are comfortable with. It may be 3, 6 or 12 months’ worth of contingency funds.
Balance this against having enough to invest into the business, especially if you have growth plans. There are formulae available to help with this calculation.
Summary
Consider the worst-case scenario for your business and mitigate against it. It does not mean that it will happen, but if it does, you will be part of the percentage of businesses which come through the dark period. We live in ever increasing uncertain times where the shift from being at the top to going to the bottom is quick. This could be due to the world becoming truly global. Whatever the reasons, small businesses need to evolve with the changing volatile times and increase their resilience to crises to survive.