Regardless of how successful your business is, maintaining healthy cashflow is not always a given. Here are some of the ways that you can stay on top of your cashflow management.
Whatever the next few weeks, months and years hold for your business, being able to rely on working capital is essential to its future success.
Forecast your working capital in advance
Having a cashflow forecast that estimates all the inflows and outflows of the business is essential. This document will allow you to instantly see when you are expecting to be paid by customers and when you have to make payments – as well as how much these payments are and how this will affect your available cash.
Ask your accountant or a financial adviser to help you put together a forecast, use a cashflow management tools, such as Float or Pulse, or search for online templates. Once you begin to enter data, your cashflow forecast will help provide indication of whether your business requires any extra funding in order for it to grow as well as identify times of the year when cashflow might be reduced – this is especially useful if the products and services you offer are seasonal or when various pension, tax or insurance obligations are due.
It might be that during periods when you have a lot of outgoing payments, or want to purchase a ‘big ticket’ item, that you seek external forms of finance to create a cashflow buffer. For example, invoice finance can help cover any periods of reduced cashflow that you have identified by enabling you to receive an advance on invoices that are owed to you. This means your business can obtain cash immediately upon issuing an invoice, rather than waiting to be paid, and therefore frees up pressure on your cashflow.
Streamline your debt collection procedures
Effective debt collection can make all the difference to your small business’s cashflow. No one enjoys chasing up late payments, but clearly setting out your payment terms, effectively tracking outstanding receivables and applying a consistent policy to chasing up unpaid invoices can help you stay on top of things.
Ensure customers and clients have all the information they need to easily make payments on time. Review your receivables ledger for negative balances or misallocated credit notes, and ensure that you are requesting the correct amounts on your invoices.
And although it sounds obvious, effective debt collection includes making extra sure that all relevant banking and transfer information appears on your invoices, including SWIFT and BIC numbers to receive international payments.
Think about external finance
Once you have gone through the first two steps, it’s time to consider your finance options.
There are a range of options available and their suitability will depend on what your business does, how much it needs and the assets it has – remember that many lenders (such as a traditional bank loan) will want a form of security from the assets of your company and in addition will require a personal guarantee from the business owner.
An alternative to a traditional bank loan are cashflow loans, which are often expensive, peer-to-peer lending – online lending platforms that enable businesses to crowd-source funding from a variety of sources – and venture capital or angel investment. In the case of the latter, an investor might be willing to purchase shares in your company but your ownership of the business will be diluted.
When necessary, invoice finance can help reduce the pain of long payment terms by freeing up cash that are tied up in unpaid invoices. GapCap is perfect for SMEs who wish to use external finance as a cash buffer, as there are no contractual obligations or hidden fees. Many competitors tend to offer a full ledger facility and/or tie businesses into long contracts, but this is not an ideal approach when you only needs to have a few invoices funded.
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