Many SMEs (small and medium sized businesses) run out of cash whilst still profitable because they are unable to meet financial obligations when they become due, so profitability should not be the sole aim of a business. Remember the mantra:
Turnover is vanity, profit is sanity, cash flow is reality.
Trading whilst potentially insolvent soaks up a lot of management time and also carries a significant personal risk to the directors, hence every effort should be put in place to ensure there is sufficient liquid cash within the business. Cashflow management is more effective with the use of cash planning tools such as a cash flow forecast and a comparative analysis. Here are some tips to help you improve cashflow:
- Use reliable financial data to track and trend as this information creates a solid foundation for improving the process.
- Bill early, accurately and in stages, as soon as work is done.
- Tighten your credit management process with scheduled phone calls, prompt follow up and chasing letters
- Encourage your clients to pay by direct debit or standing order.
- Avoid or defer non essential costs
Whether cashflow needs to be improved by enhancing existing processes, obtaining funding or creating strategic partnerships, identifying warning signs before they escalate is vital to survival.