Cash is king.
So why do many small businesses struggle with poor cash flow?
These are the lessons I learned in business which enabled me to maintain a healthy cash flow:
- Pay your creditor invoices immediately. Not in a week, not in 30 days. This not only means your bank balance is as accurate as possible, but also sends a message to all the people you contract with that your business is on solid ground. Creditors are extremely grateful too!
- Set up separate accounts for your VAT and/or Corporation Tax and put a proportionate amount aside each week to cover these costs.
VAT or Corporation Tax is NOT your money, so you should not treat it as such. This means that when the time comes to pay HMRC, you are not struggling to find the money to do so; it is already set aside.
- Arrange an appropriate overdraft with your bank to cover minor fluctuations as early as possible.
Do not leave this until you are desperate for cash. My bank manager once told me he had lost count of the amount of business owners who had applied for an overdraft simply to pay their VAT bill.
- Pay off your credit card every month.
When I set up my first business bank account, it was a condition of my credit card agreement that the balance was cleared each month. I decided early on that I would never change this, even when the bank later relaxed the terms.
- Set up clear payment terms with your customers and enforce them.
Have a regular weekly review of the debtor position. Whenever I lost track of my accounts receivable, my cash flow suffered. If possible, set up automatic payment systems, to remove reliance on the customer’s action from the equation. People delay, forget, miss a payment – it happens. With continuous payment authority, you can simplify the whole process.