How to Prevent Cashflow Problems from Bringing Business to a Halt

Running your own business can be both rewarding and challenging. You can often feel you’re alone, constantly seeking solutions to obstacles you bump up against or discovering there’s yet another skill set you need to learn. It is often likened to a rollercoaster ride for good reason: one minute everything is flying along, and the next you come to a grinding halt.

One of the unforeseen issues that can stop a business in its tracks is its cash flow position. Many business owners will look at their accounts in terms of their level of turnover or even profit, however, cash flow is not always considered, and this can cause major issues.

Why cash flow is crucial

As a business owner, it’s crucial that you come to understand the difference between profit and cash. It is not uncommon for businesses to have cash flowing out of their business before they receive payment from their customers. Without careful management of this cash flow, a business can soon find themselves in a position where they must pay out more than they have available at that moment.

This can bring a business to a halt. It can create a vicious circle, where businesses cannot complete orders and get cash flowing in without supplies, but equally cannot pay a supplier until cash is flowing in from customers. You may well find you would be in a position of profit once customers pay you, but cash flow problems stop you from reaching that point. This is often seen when working to 30 day payment terms with suppliers, but you allow your customers 60 days or more.

Getting the balance right with your cash flow is crucial. That’s why a business needs systems in place as soon as it earns revenue. So, what do you need in place to ensure you don’t run into these challenges?

Preventing cash flow problems

The first place to start is with debtor control. Systems need to be put in place to monitor that client invoicing is taking place, and that clients are paying in a timely manner. It should be clear who is responsible for both invoicing and chasing debts. Without this, it can be easy for a business to miss out on money, especially when it’s busy.

Producing a cash flow forecast is also critical. This should project a minimum of three months ahead so that you can understand the timings of money flowing in and out. This will allow young, developing businesses to monitor, control and forecast their cash flow and spot any potential issues in plenty of time. You can build a forecast cash flow tool in Excel, which should then be updated weekly.

Nowadays, there are a multitude of web-based account packages which can make an analysis of debtors and creditors much easier for businesses. A popular choice is Xero which allows you to produce aged debtors and creditors so that you can monitor revenues and expenses.

Many business owners are juggling a lot of responsibilities and have already had to develop a whole raft of new skills and therefore choose to employ professional bookkeeping and payroll services to ensure records are up-to-date and accurate. This is also particularly useful for businesses who are VAT registered or have payroll and need to pay items such as pensions and PAYE taxes. A professional service can ensure you pay the right amounts on time, adding these to the cashflow forecast.

Finally, producing management accounts will allow you to better understand how your business is doing. They can also help you when dealing with customers, banks, investors, or any other third parties.

How EFM Growth can help you

Of course, all this talk of various accounting procedures and systems can be daunting, particularly if you don’t consider yourself a “numbers person”. Sometimes, you just want someone experienced to guide and support you through these challenges. At EFM Growth, we know all about these challenges. Our associates have built, grown and sold businesses themselves. They can support you through challenges as well as drive strategies for growth.

Get in touch to find out more about how we can help you to grow your business.

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