A healthy cash flow is essential to the success of your business, and it’s important to regularly review your strengths and weaknesses in this area.
One of the most important things to look at is your cash flow habits so that you can identify areas of improvement and protect the financial health of your business.
Cash is the fuel that drives your business forward and so a healthy cash flow is the key to steady and sustainable growth.
1) Poor or Lack of Business Intelligence or Insights
Be honest: how often do you really set aside time to review key performance indicators (KPI’s)?
Poor accounting systems creates a number of problems when it comes to cash flow. For one thing, if you haven’t updated your books lately then you’re using outdated information to inform your action, which could negatively impact your results or lead to nasty surprises.
On top of this, you need accurate financial records in order to identify and prepare for cash flow shortages ahead of time.
Furthermore, you should regularly compare your progress over set periods of time to get a better understanding of how your business is performing.
2) No Annual Business Plan or Budget
You may not enjoy thinking about the worst case scenario for your business, but you still need to prepare for it.
It’s important to regularly put money aside and build up a cash reserve that acts as a buffer. This will prove enormously helpful when unforeseen expenses occur or disaster strikes.
Ideally, you should have enough to cover your costs for 3-6 months in a worst-case scenario.
Furthermore, you should secure credit whilst the going is good. Arrange a business credit card to smooth over short term cash flow issues, although you shouldn’t rely on this for long-term borrowing. This gives you some breathing space in case a big Customer is a week or two late to pay you or an unforeseen expense arises.
You should also arrange a line of credit. This is a preset borrowing limit, meaning that, like a credit card, you do not pay any finance cost until you actually use it. A line of credit typically has a lower finance cost than a business credit card. It is repaid in increments, similar to a traditional bank loan.
3) Overspending or Unbudgeted expenses
Needless to say, overspending is very bad news for your cash flow. It’s important to keep a close eye on your spending and track every Dollar – you’d be surprised how quickly costs can mount up.
However, overspending may not be down to recklessness on your part.
It could be that you’re paying suppliers or vendors too much when there is a better deal to be had elsewhere.
This is why it’s important to benchmark your existing suppliers and shop around to see if you can save money elsewhere.
4) Generous Payment Terms
Getting paid quickly is one of the best ways to protect your cash flow. However, many businesses extend overly generous payment terms based on conditions that no longer apply.
Decades ago, invoices were sent in the post and could take days to arrive. Payment was usually made by cheques which again, had to be sent back and forth and would then take days to clear.
Nowadays, however, invoices are sent via email and can arrive in a matter of seconds.
In fact, if you use accounting software to automate your invoicing process for recurring clients, you don’t even need to lift a finger to send an invoice. Furthermore, any issues with the invoice received can be addressed quickly and fixed almost instantly. In addition, electronic payments make it faster and easier than ever for your customers to pay you. Therefore, 60 and 90 day payment terms are often overly generous and unnecessarily delay you from accessing your hard earned money.
5) Being Too Lenient
It has been estimated that businesses spend over one week per year chasing late payments. This represents a huge drain on time and resources. Therefore, it may be a good idea to introduce late payment penalty as a punitive measure to recompense you for this and encourage customers to pay you on time in the future. You might also consider outsourcing credit control to an external company that has the resources and expertise to secure your payments as soon as possible.
By breaking the above bad cash flow habits and implementing positive ones instead, you can protect the financial health of your business and make sure that cash flow issues do not interfere with your growth.
By staying on top of reviewing financial performance, getting a hold on your spending and creating a contingency plan, you can identify and prepare for any shortages that lay ahead.
Meanwhile, tightening up your payment terms and being stricter about deadlines can help you to get paid faster and stop wasting time and money dealing with late payments.
Together, these improvements can totally transform your cash flow situation and put you in greater control of your finances.
If you want to Maximize your Profits and get Cash Flow under control, come and have a chat with CFO Coach today.
We will map out your unique roadmap and help you look for the opportunities to push for a sustainable Cash flow.
Get in touch with me to learn more by SMS on +260967924720 or email to Irfan.Sayed@cfocoach.co.zm or Visit www.cfocoach.co.zm
Alternatively you can choose your preferred date to set up a free 15 minute Power Discovery Call at your convenience by clicking the link – CFO Coach.
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