Budget. Budget. Budget. That evil “B” word. Most people dread it. Many don’t understand it. So, I decided to not use the word in our practice. It is not entirely representational any way. There is much more to the concept of cash then just budgeting. We prefer to use the term “cash flow.” It’s about our business cash inflows and outflows.
Like it not, everyone has heard the expression that cash is king. For a small business, that couldn’t be truer. In fact, it would be more accurate to say, “cash flow management is king.” While the number of small businesses that fail these days isn’t as dire as it used to be, a significant percentage still won’t make it.
When a small business fails, it’s typically because of poor cash flow planning. In the early days, it’s the most important thing for small business because it gauges everything else: what they can do in the short term, what they shouldn’t be doing.
Here are some of the things a small business owner should consider when it comes to staying on top of cash flow:
Have a plan
Can I say this enough? A cash flow forecast that lists all costs and income each month is a necessity for a small business. Make sure to account for every item, no matter how small, and adjust for seasonal variations. Stay on top of your customers and suppliers so that any trouble from their end can be identified early and dealt with. Update your plan regularly and talk to an expert if you need help setting one up.
“If I had to run a company on three measures, those measures would be customer satisfaction, employee satisfaction and cash flow.” Jack Welch
Invoice quickly and regularly
The sooner you send out an invoice, the sooner you’ll get paid. Set up clear payment terms from the beginning. Thirty days is standard, and interest can be charged on overdue payments. To sidestep potential trouble from customers, consider alternatives such as payment in advance or an early-payment discount. Knowing when payments are expected — which ideally will be noted in your cash flow forecast — will mean that if a due date is missed, you can get on top of it without delay.
“The most important word in the world of money is cash flow. The second most important word is leverage.” Robert Kiyosaki
Don’t delay paying bills
In your cash flow forecast, note the dates you will be expected to pay payroll, source deductions, taxes, suppliers, and other bills, and consider how you can make the payment terms most favourable to your business so that all payments aren’t going out at the same time. But never put off paying taxes, payroll or source deductions, as the penalties, once incurred, are difficult to surmount.
Manage your inventory
Cash flow can be negatively impacted if a business is holding too much inventory. Stock records should be monitored as closely as financial records.
“Never take your eyes off the cash flow because it's the life blood of business.” Richard Branson
Talk to your financial institution
Many small business owners will say that a helpful banker facilitated their start-up or saved a business in trouble. Establishing a good relationship with your financial institution and keeping communication open about any unforeseen changes in cash flow will help when the time comes for a line of credit, short-term loan, or overdraft protection.
Small business owners should take advantage of the different electronic tools that exist, such as online and mobile apps, to help manage cash flow — and the earlier they adopt these tools, the greater the chance of success for the business.
Most companies think cash flow management is something they should do once the business gets a little more substance. That’s generally too late. You almost need to start managing cash flow before you have much, and then you build discipline into the business. That’s Keeping Life Current.
Steve is the SBCN Community Mentor and can be reached at Steve@NorthernRiverFinancial.ca