Cashflow, or lack of, is the most common concern highlighted by 78% of new business coaching clients.
Simply defined, cash flow is the comparison of the money coming into your business versus the funds going out.
Incoming payments, being items such as revenue from cash sales, payments from customers, sales of assets and income from investments. Outgoing meaning taxes, wages, expenses, payments to suppliers, loan payments and so on.
As a small business owner the goal is to keep the incoming higher than the outgoing or at least to keep them in balance with one another. Knowing there will likely be unexpected expenses at some points of time, how do you protect your cash flow not only in those times but all the time?
One of the simplest ways to protect cash flow is to ensure that payments for your products or services are coming in on time. Sometimes this is easier said than done, especially when you are starting out or the economy is struggling or competition is tough. You can begin by streamlining your payment terms for your customers. Your payment terms and your follow through should be clear and consistent.
Secondly, you should ensure that your payments to your suppliers are always on time. Doing so builds your reputation as well as keeps your business reputation secure. This allows you the ability to purchase over time and borrow if needed to keep your business going should times get tight.
Another good option for safeguarding cash flow is avoiding cash purchases of equipment and office furnishings. Consider leasing, where the monthly payments are typically lower, instead of purchasing outright; this will keep more cash in your account (we refer to it as working capital) in case it’s needed. When leasing, you’ll want to ensure that your lease allows you to return or even exchange the equipment if necessary.
As a business coaching tip I suggest you always fund assets over their estimated economic lifetime value. Purchasing plant that will produce vale for 5 years? Then finance it over that time. You can then match your cash outflows with the cash inflows it will generate. The inflows must be significantly more than the outflows or it is simply not worth purchasing.
Funding your capital expenditures in this way preserves operational funds and allows you, as the owner, to leverage your personal investment to increase your returns.
This is certainly a win-win in protecting your company’s cash flow.