Tax & admin 26 June 2018

How to maintain a healthy cash flow and make your micro business more efficient

Positive cash flow is crucial to the survival of a business
Helping micro business owners avoid the negative spiral of late payments and bad debt, Edward Wade, from insolvency practitioners Wilson Field, offers some expert pointers on maintaining a healthy cash flow.

No matter how big or successful a business is, maintaining a healthy level of cash flow is key. Simply, cash is key and the lifeline of any business. It doesnt matter how good your sales and profits are, if there isnt enough cash to pay outgoing costs when they’re due the business will inevitably fail.

One bad debt, or a few bad months could set the business towards a negative spiral of being constantly behind. There are things which can be done to help a company prepare for cash flow issues and tackle the problems as they hit the business.

Identifying the common causes of cash flow troubles

For the majority of businesses and especially startups it’s just down to timing. It normally comes down to late paying clients, which leads to owners being left shorthanded and then how quickly a business is able to pay its dues. Even if a business is making lots of sales, if that money doesnt come in quickly enough a business will struggle.

Cash flow issues will sometimes occur through no fault of the business. Even if things are running smoothly, a piece of machinery could break or the marketplace could be become inflated. These unexpected costs could swerve a business off track as they have to compensate these large costs.

Perhaps the most common cause of cash flow issues comes down to a lack of planning ahead. A cash flow forecast needs to be created with all the incomings and outgoings included as part of the preparation for the business.

Read more:?How to prepare a cash flow forecast for your small business

All startup costs and the potential long-term effects this can have on cash flow need to be considered. How long will it take the business to cover those initial investments? If a business relies on certain seasons, then seasonal variations must be considered, will the business have enough money to survive the remaining months?

How can the business be more efficient with incomings and outgoings?

As well as continuous planning there are techniques businesses can put into place to help maintain a flow of cash and shore up incomings and outgoings. The idea of controlling the flow of money coming in and out of a business might seem like an easy prospect, however, in reality it’s not always that easy.

  • Be assertive with clients and if needs be, follow up on late paying clients
  • Carry our credit checks on your clients and assess their history
  • Make it the business norm to collect up front deposit payments from clients
  • Make use of outgoing repayment terms. It might mean paying on the last day of a contract
  • If the business deals with regular suppliers but the business is struggling with cash flow, talk to them and try to arrange payment at a later date
  • Try asset finance as an alternative to purchasing assets outright. Services such as hire purchase finance and leasing can provide ease up cash flow
Having clients that pay on time, is what every business need and want, but ensuring it happens can be extremely difficult. Clients are often unreliable, so it’s important for a business to stay on top of them and try to ensure they get their money within a reasonable time frame. If a client hasn’t paid within their terms, follow it up immediately. It might only be an email or phone call, but if you push them quickly, a business will be more likely to receive payment, there is nothing wrong with a business pushing for what it’s owed. This is especially important if a business is relying on one client, or just a few.

Bringing in some money, is better than not. This is why asking clients for a deposit can be hugely beneficial. The quicker money can come into the business, the easier it is to make outgoing payments. Although clients might be hesitant at first to make a down payment, it would actually break up their payment and could make it easier for them to complete payment.

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For your own outgoing payments, it’s important to be savvy when it comes to a business spending its own money. Take full advantage of repayment terms, if you have the option to pay within 30 days and it will ease cash flow troubles to pay on the 30th day, then it’s important for businesses to use this option. When it comes to paying overheads, try to make them run parallel with when the business receives regular client payments.