Poor cash flow can affect much more than the financial performance of your business. The non-financial costs of poor cash flow can have just as negative an impact on your business as the financial costs. Here are a few ways, as noted in Beyond the Numbers, that poor cash flow can affect your business.
- Increased interest and bank charges – When having to source funding externally from lending institutions extra costs will be involved. These extra costs will affect your profit and cash flow. Bank fees and interest can accumulate very quickly if you go outside their credit terms. Ensure you have the best overdraft and loan for your business.
- Missed opportunities – Poor cash flow may lead to you having to pass up on great opportunities to grow your business, e.g. you may not be able to invest in the machine that will make production more efficient or will have to pass on a supplier’s special.
- Poor relationships with suppliers – Being constantly late with payments to your suppliers may cause tension in your relationship with them. Always pay on the day the bill is due.
- Poor relationships with customers – Contacting customers for overdue invoices when you are stressed may lead to you saying things that you wished you didn’t.
- Employee morale – The culture of the business comes from the management. If the manager is stressed and worried this will reflect in the staff morale – especially if they are worried about their long term future.
- Stress – The stress from the lack of cash can influence all areas of your life and business. Stress affects three areas of your life: physical, mental and behavioral
- Solvency – The extreme cost of lack of cash flow is that you go out of business.
Tips on Managing Cash Flow as a Start-Up
As observed by Entrepreneur, these tips will help start-ups do a better job managing cash flow:
1. Know when you’ll break even.
Knowing the point at which you’ll break even won’t necessarily impact your cash flow, but it will give you goals to strive for and a ready-made target for forecasting where your cash should go in order to reach that goal.
2. Keep your eye on managing cash-flow.
“Every month isn’t enough,” says Derek Flanzraich of Greatist. “Nearly every week I’m checking both my personal and business finances.”
3. Always maintain a cash reserve.
Every startup should expect shortfalls. They happen to everyone, even with the best plans in place. But your survival likely will depend on how you traverse those shortfalls.
4. Manage funds better.
Unless you absolutely have to (which is rare), you shouldn’t handle the money for your business. That includes tracking it and handling your accounting. Hire an accountant or CFO to tackle this task for you
5. Collect receivables immediately.
Try to make any invoices “due immediately” and limit the use of net terms longer than 15 days.
6. Offer discounts to collect payments earlier.
If you don’t want to wait for normal net terms to pay out, then offer your customers a discount if they pay early.
7. Extend payables where you can.
While you want to bring payments in as quickly as possible, work with your suppliers and vendors to get the best deal you can and extend payables to net 60 or more, if possible.
8. Spend only on essentials.
Part of your forecasting model should give you a strong view of the necessary expenses that are coming down the pipe. Outside of the most essential purchases, you want to minimize spending and eliminate costs that aren’t essential to your operation until you’re profitable.
9. Be smart about hiring.
A highly skilled worker is likely to be able to tackle the work of two or more mediocre employees.
The Top 4 Cash Flow Forecasting Mistakes
Forecasting your businesses cash flow is a fundamental element of the cash management process. Without timely and regular forecasts the business owner runs the risk of letting surprises slip by. Note the following cash flow forecasting mistakes:
1. Changes in receivables and payables.
As noted in Simple Studies, companies should set optimal accounts receivables and payables levels through corporate and financial strategy, then forecast those accounts according to their plan.
2. Tax liabilities are another source of variability in projecting cash flows.
Tapping into the expertise of the company’s accountants before the annual cycle begins is a good technique to avoid problems in the tax line.
3. Reporting cash flows from financing and investing activities.
This requires a relatively high-level understanding of GAAP and/or IAS standards and principles. To read more, see this excellent piece from accounting firm Grant Thornton.
4. The biggest cash flow statement error can start at the top: the income line.
The statement of cash flows is built upon the foundation of income delivered from the business’s operations, and errors in income projections can have a large impact on cash flows. Top financial teams actually build from projected contributors such as pricing, volume and product mix (and that can be across divisions and geographies). Using the basic building blocks to drive forecasts does two things: it provides a solid structure to the operating performance of the business and it raises relevant questions all along the way.
In conclusion, the task of cash management may seem a daunting task. In fact, larger organizations have carved out a function referred to as “treasury,” which is dedicated to the function of cash management. In any case, the effort is far and away worth it because the eventual alternative is going out of business for a shortage of cash.