How to better manage your company’s cash flow
If we were to draw up a list of challenges small business owners face, cash flow management would be close to the top. Too often, promising small businesses are going under all because they’re unable to manage cash flow and maintain profitability levels. Without good cash flow management, your franchise won’t be able to pay your bills for long. Or worse, you may have to pay more to borrow money to function. Don’t become a statistic! Discover what you need to do to better manage your company’s cash flow and ensure business survival.
What’s cash flow management?
Careful cash flow management achieves three things:
- It allows a company to estimate the cash it will have on hand at any one time.
- It lets a company project trends in cash inflow and cash outflow.
- It enables a company to evaluate whether a shortfall or surplus in cash could potentially occur.
As a small business owner, you want to keep money coming in. And minimise the money going out of your business. After all, cash is king. Cash flow is the blood that keeps the heart of the business pumping.
The definition may be simple. But our experience in business shows that managing cash flow has long been, and will long be, a pain point for many small business owners. But don’t fret. We’ve enlisted the help of experts from whichfranchise.co.za to simplify things for you.
Manage cash flow and keep on top of finances
Have a cash flow forecast
One way to manage cash flow is to prepare and maintain a cash flow forecast. Depending on your company’s situation, you can prepare a cash flow forecast for the next year or the next quarter. If you’re on shaky ground, have one for the next week. Update the forecast weekly to get an accurate outlook for the next six to twelve months. Your franchisor should have a good idea of what a typical cash flow forecast should look like for an operation of your size.
An accurate cash flow forecast can alert you to trouble well before it strikes. It’s all about:
- Being proactive;
- Knowing your break-even point; and
- What you need to do every month to cover your costs.
Agree on clear payment terms
Establish clear payment terms from the outset and communicate this to clients or customers. This way, you’ll know when you’ll get paid. You also need to send out invoices quickly and follow up on overdue invoices.
Keep your fixed costs low
Keeping the fixed costs such as rent low will ensure you have more funds available for unexpected costs. Remember, lower fixed costs also mean greater profits. Be smart about re-negotiating your lease agreement, if you can’t pay less, try to get more services from your landlord or an allowance for a revamp to your premises.
Save in the good months
In business, you must pay expenses every month of the year. This is regardless of whether the franchise has a good or a bad month. When business is slow and the income drops, you still have to have money to pay for these expenses. You can only pay if you have saved money during the good months. This also means not taking money out of the business until you can really afford it.
Enforce payment discipline
Consider asking for a deposit or a partial payment on your product or service in advance. This way, if a customer fails to pay on time, your business doesn’t go bust.
Also take steps to shorten the period between invoices and accounts receivable:
- Offer a small discount for customers who pay early;
- Provide convenient payment methods;
- Deliver exceptional customer service; and
- Develop relationships with customers.
Enforcing payment discipline should also be part of your payables operations. By paying on time, you can build a relationship and negotiate for future discounts or payment terms that best suit your business cycle.
Don’t skimp on local marketing
While the franchisor is responsible for national marketing this does not mean that you don’t have to drive new business activity. Set aside a generous budget for local marketing and keep track of those activities that make the tills ring. Even in tougher times keep some budget aside for local marketing activity.
Beware of sources of cash flow problems
Understanding cash flow problems that small businesses face is critical if you intend to escape the trap.
Here are the common causes of cash flow problems:
- Needless spending.
- Paying your bills too early (The longer you have the money, the better your cash flow is).
- Poor debt collection methods.
- Discounting too deeply.
- Having too high overheads/expenses.
Don’t let poor cash flow management be your downfall
Cash flow management is critical to the survival of a small business. Up to 80% of new small businesses fail because of poor cash flow management. Stick to the cash flow management solutions provided. If you have persistent cash flow issues due to customers paying late or other issues, it’s a good idea to approach your bank about an overdraft. As long as the business has proven that it is sustainable and profitable, you should be successful in your application. You should also consider applying for an overdraft when starting a franchise as it takes time to register for VAT and the delay in getting your refund could also lead to cash flow issues.
The experts at whichfranchise.co.za want to see small businesses succeeding. They’ll like to know what you struggle with the most when managing cash flow. Get in touch with them here. They also welcome questions on franchising and offer advice and opportunities in South Africa.