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Expert Answers to Biz Questions
Listen in! Pick up some expert advice to a reader's question that we selected from CyberSchmooz.
7 Crucial Steps to Controlling Poor Cash Flow
‘Cash is king’ – this expression accurately reflects the importance of having a good cash flow in your business. The Ormsby Street conducted a study in late 2016, revealing that only 4/10 new business make it to the 5-year mark. Small businesses need to plan at least five years in advance to survive UK’s small business industry. According to the report, late payment of invoices can cause poor cash-flow which in turn can be managed with certain steps. These include checking credit reports on a regular basis, using the right tools to trade with customers, reducing the risk of non-payments, etc.
To control and maintain your cash inflow and outflow, you need to focus on the following:
- Accounts payable – These indicate the money you owe to your suppliers.
- Accounts receivable – These indicate the amount of money owed to your business by customers.
- Shortfalls – Financial instability can occur due to any reason, which may or may not be your fault. You need to reserve some funds to support your business in case of unexpected cash flow issues.
Our following seven crucial steps for controlling poor cash flow are based on these three factors. Have a look!
1. Discuss it with Recovery Professionals and Finance Experts
Many businesses have a proper system for managing cash-flow. However, various factors involved in the process can complicate cash-flow management. Financial experts can evaluate your cash-flow management system and guide you about the necessary steps required for optimal performance. First, you should assess the problem yourself to ensure you fully understand it. If you’re not sure how to go about this, you can still utilise a professional’s expertise. A good example of how to do this can be seen through the insolvency advisors http://www.companyrescue.co.uk/ with whom you can first take a free insolvency test, then contact them directly for help if you feel you need it.
There is another benefit of hiring corporate recovery professionals and finance experts. After evaluating the performance of your business, they can guide you about the possibility of insolvency and identify potential risks. They can also guide you about techniques for mitigating risks and preventing cash flow problems in the future. Improve Cash Receivables
To improve your cash receivables, get customers to pay you in advance. Ideally, it should be net-60 advance to ensure that your payments to suppliers are not affected.
You can also ask customers to preauthorise their cheques, so that the banks can withdraw a certain percentage against the client’s account. Also, centralise your banking operations to one account or bank only.
1. Negotiate Credit Requirements
Many small businesses, or businesses in the process of expansion, need to increase their credit allowance to customers. Before extending the credit limit, make sure to calculate your necessary payments, including bills. Now, calculate the cash inflow to find out if you can meet your expenses. If there is a risk, you can either decrease the credit limit or negotiate with banks to provide discounts on the use of specific credit cards for payments. You can use this discount to offer greater credit flexibility to your customers.
2. Regularise Balance Sheets
Balance sheets indicate your cash inflow and outflow along with your assets and liabilities. Include potential liabilities and contingent liabilities in the balance sheet. Update your balance sheet regularly to identify any cash-flow issues. You should also keep your monthly credit report up to date.
3. Manage Payables
If your top-line sales are expanding, it doesn’t mean that your business is in profit. You need to examine the costs carefully to evaluate total profits. For this, communicate with your suppliers and creditors regularly and keep them updated about your financial situation. Keep a well-maintained calendar for managing your payables and avoiding penalties on late payments.
4. Prepare Financial Contingency Plan
Having a financial contingency plan is useful for surviving economic downturns and avoiding insolvency. You can also have a savings account for supporting your business during tough economic times, but you need a financial contingency plan to ensure that your savings are being used appropriately. You can seek guidance from a professional financial advisory service for preparing an effective contingency plan.
5. Boost Sales
If your balance sheet represents low cash inflow but high cash outflow despite of good financial practices, then you might need to change your business practices. You need to trade more or boost sales by adopting creative strategies which do not require a lot of investment. You can negotiate with your bank and offer discounts on the use of certain credit cards. You can offer exclusive discounts to students or customers from specific professions. Your profits are usually not affected when you restrict discount allocation.
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