Monday, December 12, 2011

Small Business Tips - Managing your cash flow

Managing your cash flow

How to get control of your cash flow

If you're running a small business, then you know how imperative it is to effectively manage cash-flow,, the lifeblood of any healthy enterprise. Cash flow difficulties are identified as one of the most common sources of stress and anxiety among small business owners.

It may be timely to review nine essential disciplines around good cash-flow management ....
  1. Understand and plan for your natural business cycles, where there are predictable seasonal ebbs and flows to your business finances. Like a squirrel, have the discipline to store away some of that cash-flow to draw upon during quieter times.
  2. Offer as many ways as possible for your customer to pay, making it easy for them to do so quickly (cash on delivery, EFT, various credit cards accepted, cheque with ID)
  3. Late payments from your customers have a flow-on effect to your ability to pay your bills. So, either offer an incentive to your customers to pay before the due time (eg 5% discount), or ensure that you politely follow-up at the first instance of an overdue payment (be careful to avoid any heavy-handed approach with this - although with regular late payers you might need to consider charging late payment penalty fees being charged)
  4. Offer a discount for cash up-front payment, or at least request a significant deposit when you are receiving payment on a later delivery
  5. Try and build a relationship with your bank. Explain your business cycles and talk about setting up a special overdraft facility that can ease your cash flow stresses and carry you through the tough times
  6. If your customers do not pay at point of sale, ensure that you send your invoice out on the day of purchase, rather than at the end of the month for example. Also ensure you do a credit check before taking on a new customer making a substantial purchase
  7. Seek to take advantage of economies of scale when you purchase. There may be opportunities to purchase some goods in greater volume by forming a purchasing alliance with a business association, or with similar although not competing businesses in your local area. For example, if you needed to purchase new office furniture, .maybe there are some small businesses around you who can join with you to benefit from discounts through greater buying power.
  8. And let's not forget the simple and essential rule for small business, avoid spending more than you earn. Yes, there will be times you need to invest in significant equipment or technology upgrades, but make sure such an outlay is carefully evaluated against the cost-saving efficiencies that it will produce, or weighed up against a realistic financial assessment of new revenue streams that the purchase will generate for your business. In the latter case, although you need to generally have an optimistic outlook as an entrepreneur, you are usually better served by adopting a conservative approach with your revenue forward projections. If need be, ask your accountant
  9. The only way you increase your profit margin us to increase the volume of your sales, reduce the cost of your sales or increase your prices - whilst obviously keeping a close eye on your competition.
And a fantastic article titled the E-Myth - Why Businesses Fail is fascinating reading to help understand the complete skill set needed by anyone starting up in business. Research into the reasons for small business failure have revealed that quite often the business is initially founded by a person with strong technical skills (a printer, a builder, a mechanic, a baker, a lawyer..) who is highly skilled in their craft, but often do not possess or do not develop the additional skills required to run a business.

The technician must learn to become an entrepreneur (customer and market focused) as well as a manager (process and procedure focused) if they are going to succeed in building a business that can run independently of them.