The importance of your cashflow
Predicting the peaks and troughs of your cashflow throughout your financial year can help to reduce the impact in negative periods.
Cashflow refers to the amount of cash you have available to pay your bills, whether it comes straight from retained profits, your overdraft or some other loan facility. The bottom line is that is you can’t pay your creditors they may refuse to continue to supply you with goods and services you need to fulfil your contracts with customers.
Cashflow and Profitability
These two terms have different meanings.
Profitability is the net difference between the total amount your business earns and all of its costs; cashflow on the other hand is your ability to pay your bills on a regular basis.
Cashflow is not just about the amounts of money moving in and out of your bank account but is also dependent on the timing of these movements.
The importance of forecasting
Cashflow management is much easier if you can predict the peaks and troughs in advance and take steps to reduce the impact of any period of negative cashflow.
To do this you’ll need to produce a cashflow forecast that gives you a month by month prediction of the amount of cash you are likely to require. An accurate cashflow forecast can give you an idea of your borrowing requirements or alternatively, the amount of excess cash you may have available for investment, development or disbursement.
Five ways to improve your company’s cashflow
• Bill Promptly
If you don’t have a system in place, start billing for projects on a regular basis. When taking on longer-term projects or clients, negotiate in advance for regular payments instead of allowing the amount due to build up until completion of a contract.
• Create incentives for faster payment to you
Small businesses can sometimes significantly cut the time spent waiting for payment by offering a discount for quick payment.
• Avoid slow pay/no pay customers from the start
Weed out the slow payers or no pays before they become clients. This means checking out credit references and calling other businesses that have a relationship with the client.
• Use barter instead of cash
You could reduce the strain on your immediate cash if you need goods or services from someone and can barter goods or services of your own in return.
• Consider consolidating your loans
If you have several business loans or related loans such as cars, equipment, credits cards etc. you may be able to consolidate two or more of these into as lower interest account and improve your cashflow. It may also be worth taking out a longer-term loan agreement in exchange for lower monthly payments.
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