7 tips on maintaining a healthy cash flow

Brendan Flattery, MD of Sage’s Small Business Division, looks at how small business owners can ensure they get to grips with their cash flow.

25th May 2010 at 9:47 am

Cash flow is the lifeblood for organisations. In today’s uncertain economic climate, it is more important than ever to stay on top of your finances. For entrepreneurs that get it wrong, it can mean the end of their business. But those that get it right will be in a very strong position when the upturn comes.

Having a healthy cash flow is vital for all companies, but the consequences of not managing it well can quickly have a massive impact for start-ups. A small business can only survive for a limited period with a negative cash flow, and ultimately the business will end up insolvent. Entrepreneurs must set up processes which help them keep a close reign on their cash flow from the moment they are in business.

For small businesses wanting to improve their company’s cash flow, here are my seven top tips:

1) Understand where your company’s money is – It is surprising how many small businesses fail because their owner doesn’t know how the company’s finances stack up. Learn what funds are coming in and out of the business each month. It is critical that small businesses remain aware of how much money they are owed and when payments are due, so late payments do not occur in the first instance.

2) Learn about your customer’s habits – Every business has a set date each month that they will pay their invoices, make a note of when these are for your customers. This will allow you to plan when your firm should pay suppliers.

3) Plan and forecast for the future – By developing accurate forecasts for the year ahead, managers will be able to best plan for the future, in terms of expanding the business and identifying any potential future challenges, such as staff resources.

4) Be transparent with your company’s cash flow – Make sure that all your employees are kept informed about the state of the firms cash flow. This will prevent any employees from making any large purchases at the end of the month, or when your firm is waiting for a particular customer to pay their invoices.

5) Negotiate longer credit terms with suppliers – Check to see whether suppliers offer a discount for early settlements, if they do make sure you take advantage of this opportunity. To make your money go further, arrange monthly payments for annual costs such as utilities.

6) Make sure you are up to-date with your invoices – Invoice all your customers promptly and keep track on when they pay. If you are working on a longer contract, agree monthly stage payments or make sure you receive an up-front deposit to pay for materials, etc.

7) Stay clear of bulk ordering – Having excess stock ties up vital cash flow. Try to work on a sale or return arrangement, so that you have as little stock as possible which can be turned over quickly.

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Brendan Flattery is the Managing Director of the Small Business Division, Sage UK and Ireland. Sage provides business support and services to more than 790,000 firms in the UK from Start-ups to FTSE 100 companies. http://www.sage.co.uk

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