A shortage of cash on hand can quickly place incredible pressure on your small business, as you won't have enough money to cover employee salaries, rent, utilities and other day-to-day payments.
Nearly one-third of start-ups fail because they run out of cash on hand, according to CB Insights research. Figures from MarketInvoice show that Australian customers are also the slowest in the world at settling debts on time, with the average payment over 26 days late in the country.
Sales and profit are important, but you'll need enough cash reserves to keep the lights on. Here are four things you can do to better manage your cash flow.
1. Forecast your cash flow
An accurate forecast enables you to estimate how much money you expect to flow in and out of your business over a specified timeframe. To compile an effective forecast, you must estimate:
- Current levels of cash on hand;
- Your likely sales;
- Expected payment times; and
- Your predicted fixed and variable costs.
Calculate your revenue minus costs and subtract this from your available cash on hand to assess what your money situation will be at various points during the year. You may wish to contact an experienced accountant to help with your forecast models to ensure you don't forget crucial elements.
2. Set out clear payment terms
Late payments have a significant impact on small businesses and their directors. MYOB research revealed over half of SME owners said they suffer stress and anxiety due to customers failing to settle invoices.
Furthermore, 52 per cent believed a lack of regard for invoicing terms and processes was the primary cause of delayed payments.
MYOB (@MYOB) October 27, 2016
Establishing clear payment terms from the outset is therefore vital if you want customers to settle on time. You may also want to offer discounts for those who offer payments ahead of the due date.
3. Build up your cash on hand
A cash reserve can be used as both an offensive and defensive measure, ensuring you have enough money to take advantage of opportunities, while also enabling you to protect your business during slow sales periods.
Accumulating cash on hand gives you the freedom to accept large orders from new customers, buy stock in bulk and invest in innovative technologies to drive profit.
Having money in the bank also means you are less reliant on credit, lowering your interest payments. Ultimately, the more cash on hand you have, the more choices you can make over your small business growth plans.
4. Consider your finance options
Planning for the future can prevent cash flow problems, but you should always have a financial safety net in place if your sales begin to take a hit.
A number of finance options are available if you exhaust your reserves of cash on hand. One option is invoice factoring, which enables small businesses to sell its accounts receivable to a third-party firm at a discount for an immediate injection of money.
You can also open up or extend a line of credit with your lender. This serves the same function as a credit card, allowing your business to settle unexpected expenses when you lack enough cash on hand.
Do you have enough cash on hand?
Whether its late payments from customers, a drop in profits or other unforeseen issues, the amount of cash on hand you can access may make or break your business.
WMC Accounting can provide a range of business advisory services to ensure you have enough cash on hand to sustain and grow your operation. Please contact us today to learn more about our forecasting, finance and budgeting offerings.