7 ways to avoid the pitfalls of cashflow

7-ways-to-avoid-the-pitfalls-of-cashflow

All business entrepreneurs know that cashflow is king. But just how much influence does it have on a business? Well, according to a recent study conducted by Dun & Bradstreet, nine out of 10 small businesses have failed because of cashflow problems and poor cashflow management.

Cashflow management isn’t rocket science and should be a key focus of any business owner. Put simply, it means doing everything possible to ensure that more money flows into your business as quickly as possible and exits as slowly as possible. It also means keeping an eye on the future and taking steps to mitigate any potential issues that may creep in down the line.

The high business failure rate tied to cashflow pitfalls often arises from lack of focus on cashflow and an underlying lack of profit in the business. As the business owner, if you’re to avoid becoming just another survey statistic, check out these tips for avoiding surprises.

  1. Profitability Doesn’t Equal Cash

Profitable businesses are just as likely to close their doors for cashflow reasons as unprofitable ones. If your costs are high or you’re reinvesting your profits back into your business then your cashflow can quickly become compromised. Conversely, a loss making business is certain to run out of cash at some stage, hence a declining cash balance is often a symptom of not making post tax profits.

  1. Don’t forget to Forecast

Get as much foresight as you can into when cash is forecast to enter and exit the business. Cashflow forecasting is deeply important in this regard. Your cashflow forecast will not only help you understand your future cash situation it can help you spot any surprises and take steps to mitigate them before it’s too late.

  1. Revenues aren’t realised until it’s in the Bank

Your monthly budget may be in control and your P&L statement looks great, but if sales invoices do not convert into cash in the bank before your payroll and monthly bills must be paid, then you may have a cashflow problem.

  1. Recognise Seasonality

Business seasonality has a big impact on cashflow. If you run a seasonal business then many of your outgoings (inventory purchases, rent, staffing costs) are still made at times when you are not selling enough to cover these costs. Plan ahead and analyse trends closely so that you can identify highs and lows and manage your company’s cashflow and if needed, secure funding facilities to bridge the seasonal gap.

  1. Plan for those Unexpected Moments

Unexpected expenses and emergencies such as illness, a natural disaster, the loss of your star sales person, and so on, can all impact your bottom line. Have a plan to prepare for these eventualities, whether it’s having a financial cushion, a succession plan, business insurance, or cross-training key sales personnel.

  1. Implement best practice for Invoicing and Collections

Late paying clients are a real problem for SMEs. Here are just some of the stats from the recent study:

  • Only 50% of companies pay their invoices on time
  • 64% of SMEs report having invoices go unpaid for at least 60 days
  • 14% of small businesses cite late payments as their biggest concern

Look for ways to overcome this burden by invoicing promptly, setting up invoice reminders, and have a good credit management ethos. Collect and chase payments by phone from your customers in advance and as soon as your payment terms are reached.

  1. Be ready for your company’s Scale-Up

Remember that growing your business comes with additional costs – inventory, equipment, marketing campaigns, etc. As the business owner, you can manage the cashflow impact of growth by invoicing in advance of paying suppliers, having the right type and level of debt facility (e.g. overdraft, loan or invoice finance), plus good management information to trade and report growth.

Many SMEs 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, cashflow is reality”.

We designed the EFM Cashflow Healthcheck tool so you can easily get an indication of the financial health of your business. This review will alert you to situations that need to be addressed, so you have a better idea of where your money is, where it’s going and what you need to do, to stay in control.

Are you looking for support with your company’s cashflow management? Our nationwide team of qualified & experienced EFM Experts can help. Get in touch today for your free one to one consultation. Call 01582 516300 or email clientcare@efm.uk.com