Cash is King – the ultimate SME cashflow Guide

Published On : 08/12/2017

Carl Reader, author of The Start Up Coach, co-owner of dennisandturnbull.com 

You don’t need to be an accountant, but as a business owner it’s important that you are aware of some key financial statistics within your business. Anyone who has been in business knows that a key factor in being able to sleep at night is having enough cash to pay the bills.

Cashflow Guide

Often, many small and early-stage businesses are “bootstrapping” or at least operating on a tight budget, so ensuring that your finances are managed correctly is crucial to success and to making sure that you aren’t left with more month than money. “Turnover is vanity, profit is sanity but cash is king” – it’s a much-repeated phrase in business, and with good reason. Ultimately, it means cash is absolutely vital for the health of a business.

However, the difference between cash flow and profit can be a source of confusion for business owners, many of whom think they’re the same thing. This can make financial matters unclear and confusing. For example, a business could have a £100,000 profit on paper but their bank accounts may show that they’re still overdrawn and are struggling with their cash flow.

Many items are included in a profit and loss account but they may not be visible in your bank account. For example, making a trade sale to another business would not necessarily show up in your accounts, as you would usually send them an invoice with a period of 30 days for them to pay. On the other hand, your payment for a purchase would not show up in your accounts until it has actually been paid.

Whether it’s struggling to keep up with changes in the market or not being able to receive any funding, it’s little wonder cash flow problems are a common reason for business failure. It is therefore vital that all businesses take every step possible to ensure that their cash flow is managed effectively. Here’s a few simple tips to make sure that you are always on top of your bank account.

Plan in advance

You have a cash flow projection, right…? If not, the first thing you need to do is map out your likely cash flows over the year. This will help you identify any upcoming tight months, and should you require it, it will provide you with the basis of your business plans for any external funding. Remember however that this plan isn’t just for the bank. You should monitor actual performance against plan, so that you can adjust accordingly.

Every day, you should be able to know how much cash you need to pull in by the end of the week and the month to pay the bills, your payroll, and leave enough for you to be comfortable. Without knowing what needs to come in and what goes out every month, you don’t know how to target your cash collection efforts.

Invoice your customers promptly

If you do not raise your invoices promptly, you have no chance of getting paid promptly. The way I see it, the value of any work performed for a customer decreases every day that you delay raising an invoice. In other words, customers are most enthusiastic about your service or product on the day that they purchased it. Their initial excitement is likely to disappear over time so if you leave it two months before getting round to invoicing them, they may not believe it’s worth what you originally charged them.

Invoice everything that you can – accurately

This is perhaps more important than the last tip because although a late invoice may get paid, an invoice that’s never raised is never paid. This may seem obvious (as most business tips are) but it surprises me how many businesses don’t have a system to ensure that all the work they do or products they sell actually get invoiced.

With this said, it’s dangerous to invoice any more than you should. Not only is this practice illegal and unethical if done on purpose but it will also give the customer a chance to dispute the invoice, which will drag out the time before they pay you. It is therefore vital that you have an accurate invoicing system that can help you avoid errors on invoices.

Chase your debtors

Another obvious-sounding one – but vital. Once you have raised an invoice, you need to actually chase the debt, or you’re unlikely to get paid. Remember the squeaky wheel gets oiled! Many business owners shy away from this because they’re fearful of upsetting their customers but it’s worth bearing in mind that a customer who doesn’t pay you is usually not worth keeping. Make sure that you keep a regular report of debtors and have an agreed follow up process for contacting your customers.

Consider your paymentterms

Many businesses automatically default to 30 day terms of payment. However, you’re free to set whatever terms you want. Make sure that your accounting system is able to report on overdue debtors as soon as they become due.

What about your credit?

On the flip side, your suppliers will also have payment terms and you should be able to use these to your advantage. For example, if one of your suppliers gives you 30 days’ credit, you could use this credit to help fund your business. To be clear – I am not suggesting that you perpetually pay late, just that it can sometimes be beneficial to make the most of the permitted credit terms. They may offer good settlement discounts however, so check your options. It may be worth considering using settlement discounts on your own invoices too.

Make getting paid easier

Do you take credit cards? Direct debits?Online payments?

Think about the ways that you can make life easier for both your customers and yourself. Is there any way you can accelerate the payments into your business? Think about whether you could charge a deposit, or an upfront payment in advance of the service.

If you do anticipate cash flow difficulties, make sure you speak to your bank at the earliest possible opportunity as they might be able to support you through any difficult period. They have a vested interest in you continuing to trade so, provided that you approach them with a sensible proposal, they will probably want to assist you by offering some additional facilities. It’s essential to not bury your head in the sand over these matters, as financial support is not easy to obtain and is usually expensive later on.

I can’t overstate the importance of all of the above when it comes to staying on top of your cash flow. By implementing all of these practices into your business, it’ll keep you in a healthy position on a monthly basis and, as long as your product or service is selling well, you should find yourself on the road to commercial success.

Uma Rajagopal

Uma Rajagopal has been managing the posting of content for multiple platforms since 2021, including Global Banking & Finance Review, Asset Digest, Biz Dispatch, Blockchain Tribune, Business Express, Brands Journal, Companies Digest, Economy Standard, Entrepreneur Tribune, Finance Digest, Fintech Herald, Global Islamic Finance Magazine, International Releases, Online World News, Luxury Adviser, Palmbay Herald, Startup Observer, Technology Dispatch, Trading Herald, and Wealth Tribune. Her role ensures that content is published accurately and efficiently across these diverse publications.