How to fix cashflow problems in your business should be one of your top priorities as a business owner. This is because cash king. It is the life-blood of a business. A good cashflow helps you be on top of your business expenses, on top of your HMRC compliance and payments and it will also help you manage your divindeds better.
One of the main reasons why businesses go bankrupt is poor cash flow management.
The more you understand how to manage the cashflow of your business, the better you position yourself on the way to better profit and steady growth.
One of the first steps to take is to understand what the driving factors of cashflow are. Then you will have a clear picture of what needs to be improved or changed in order for your business’ cashflow to work for you rather than against you.
In other words, you need to understand what the processes are in your business that directly affect cashflow. For example, cashflow is directly impacted by how you order stock and pay for it, by how you bill for your services and how you make sure you get paid by your customers. Let’s dig into how to fix cashflow problems in your business !
Treating the symptoms of poor cashflow without fixing its underlying causes is a sure way to failure.
In order to fix these underlying causes, you need to be willing to make the necessary changes to your processes. By making these changes, you will build a much better and valuable business as well as improve your cashflow. While there are many causes of poor cashflow, most of these relate to one or more of the following processes.
How to fix cashflow problems in your business
Customer payment terms
There is cash out there that is yours, but it has not reached your bank account because the customers are late in paying or because the terms of payment you offered them allow them to pay in 30 days, 60 days or even later. You need to reassess how customers pay you. Depending on the type of your business, you may want to ask for payment upfront or payment on delivery or payment in 7 days, and so on. You definitely have to have a system where you receive payment from your customers before you have to pay your suppliers.
Supplier payment terms
As we have already established, your terms with the suppliers have to be such that you pay them after you received payment from your customers. In this way you will always have cash available to pay your suppliers.
A good idea would also be to have spending budgets in place. You would always know how much is needed to stay in the bank at all times so that payments to suppliers be paid on time.
If your business is seasonal or if your cashflow tends to follow a cycle, then an annual budget and an accurate cashflow statement can shed light on just how much money you’ll need each month to pay recurring bills. You’ll need to save money from the high-revenue months to cover the expenses during lower-revenue months. A monthly cashflow forecast can reveal potential shortfalls and give you time to seek extra cash if needed.
Stock turn times
If your business operates in buying and selling goods, then you have to make sure your stock is not moving too slowly. You have to have a system in place such that the stock you have already paid for turns quickly into cash.
Though going into debt is not advisable, there are businesses that take loans or other forms of finance. If this is your case, then you have to make sure that your loans are not being repaid over too short a term, because this will place a big strain on cash reserves. The loan you take has to be affordable.
Your business’ profit is what’s left from sales after variable costs have been deducted, such as costs of materials and costs of labour (the workers on variable hours). If your profit is too low, it won’t be enough to cover fixed expenses, such as rent and salaries and it will not be enough for your drawings from the business (the money you take out of the business for your own personal use).
It is highly advisable that every business do a thorough review of its expenses at least once a year. You may find that some expenses are not necessary, other expenses can be moved to different suppliers under better terms and quality, and so on.
Your business needs to sales in order to support itself and to bring a profit. If you don’t have enough sales, then you may need to understand what the cause of this is. Or you may find that your business has lots of sales, but still cash is a problem, in which case a review of the prices is in order.
Selling products or services at too low a price can negatively impact your margins. Take a step back and audit your products and services to determine the fully loaded cost of delivering them. With that cost in mind, you can determine whether you are charging too little and hurting your bottom line.
How can LAS Accounting help you ?
You deserve to know exactly where you stand with your finances and how to fix cashflow problems in your business. You deserve to feel excited about the future, not anxious. We’re here to support your growing business in any way we can. With our help, you can be confident that your accounting is an investment into building the business of your dreams. To start turning those dreams into a reality get in touch with us.