In business, and SME’s in particular, cash is king. Not that cash, cash flow. This, to me, is the most important thing to bear in mind when running a business. You might have the best business idea, or be selling a fantastic product or service, but if you do not have the cash flow to set up, or get through seasonality, downturns, and general business cycles, then it is all for nothing, and you will not be in a position to reach the end game and achieve the payoff for your hard work.
There are some things to keep in mind when bringing your cash flow into focus:
- Invoicing – you will never get paid before you raise an invoice. Raise invoices as soon after the good or service is provided as possible.
- Debtors Collections – keep in contact with your clients and customers regarding overdue debtors. We all understand that businesses go through cash flow cycles, and it might be worth discussing setting up either periodic invoicing or payment plans to smooth out the lumpiness.
- Holding Stock – hold as little stock as is possible without causing operational issues for your business. The cost of holding stock is either interest on loans to do so, or the opportunity cost of what that cash could otherwise do in your business or private life
Trade Creditors – keep a close eye on the amounts owing to your suppliers, and the timing that these fall due. If there appears to be a bottle-neck in terms of cash flow, get on the front foot to your suppliers to set up a payment plan, or periodic invoicing if appropriate. - Consider Seasonality – During this process, take some time to review Sales for seasonality. You will have a fair idea of this without a formal process, but set out the sales month by month for the past 3 or 5 years. This will confirm any suspicions or may make for some interesting reading. This will enable you to plan your stock levels, your staffing levels and other inputs.
- Overhead Expenses – this is especially important in the first few years in business. While it may be tempting to finance the various plant and equipment, in the initial stages it might be better practice to hire as needed. Also, if you have paid out vehicles or equipment and they are in good working order and not costly in terms of repairs and maintenance, it might be worth considering holding these for a further period of time, rather than upgrading immediately on paying them out.
- Spending purely to get a Tax Deduction – this is something I see a lot of, and I think this is a big misjudgment by small businesses and individual taxpayers alike. The thing to bear in mind here is that for every $1 you spend to get your tax deduction, the maximum you will get back is $0.49 – and that is if you are in the highest tax bracket. You are still $0.51 out of pocket. If there is a genuine business reason for the spend, then that is worth it, but spending with the main aim of getting a tax deduction is just bad business.