The Importance of Cash Flow Control in Your Business
For your business to operate efficiently, it needs careful cash flow management. Making sure that you have enough cash available to buy stock, pay bills, pay wages and pay yourself is totally crucial to you and your business's survival and growth.
When you are starting a business you will make a number of financial decisions and you will have to live with the consequences of those decisions from then on. The average small business startup is financed out of the owners money or a loan, one of the requirements of a loan is usually a realistic cash flow projection for the first year, and if you are going to be paying somebody's wages as well as your own, you need to stick closely to that plan.
What can seriously complicate things is when you give any of your customers credit, especially if they end up being late or even default on their payment. This can cause serious cash flow problems, doubly so if your business has been buying on credit and is reliant on these customer payments to cover that expense. Keeping records that are updated regularly is the best habit you can get into when starting and running a new business. All your financial transactions need to be recorded and available for review on a spreadsheet at any time.
Your cash flow projection is really important if you want your business to be able to stay on an even keel and be able to pay its bills and wages on time. This way you will be able to accurately forecast when bills and expenses will need to be paid, when payments will be coming in and times when you know that your resources will be at their most stretched. You have to be as realistic as you can about projected sales figures and keep this maintained for the coming year every year. This way you have the best chance of being able to survive the difficult times and you know what your minimum sales targets are.
If you are going to allow your customers credit, and especially if you are going to let them have high value sales on credit, you simply have to make sure that their credit rating is good enough. You need to have agreed payment terms in writing with your customers in this situation, be prompt in sending the invoice for the sale and if you do not receive the payment on the date expected you need to complain to the customer and escalate the problem up the customer's management hierarchy if the bill remains overdue. You need to be prepared to send a threat of court action if it remains unpaid and you have to consider writing the debt off permanently if taking them to court is looking more expensive in terms of time and money lost to your business. Another option may be to re negotiate for a payment plan or even agree on a single reduced payment and call it quits. Either way, you certainly will not be offering credit to that customer in the future but you may be able to keep them as a customer if you show a degree of flexibility and professional courtesy towards them.
When a situation like this arises you have to be able to weather the storm and this can mean having to delay or cancel orders or else having to re negotiate with your suppliers to give your business the breathing space it needs to recover from this emergency. Having an accurate cash flow will help you to see at a glance your assets in terms of cash, stock and orders in progress as compared to your outgoings and commitments. You may find you will have to defer expenses such as the purchase of new equipment in order to buy the time your business needs to get back on track.