Top Tip: Financial Healthcheck #6
This week we’re talking about cashflow and solvency. How solvent you are is a measure of your ability to pay your day to day bills as they come in. Cash, as they say, is king. And keeping on top of cash flow is crucial, especially in the earlier years of your business or at times when you are expanding.
Speaking to makers here at Cockpit it seems that March and April are often quiet time sales-wise for the craft sector. Whatever your yearly sales cycle looks like, it’s a good idea to put together a cashflow forecast at the beginning of every year to help you plan. See our guidance notes on how to do that here.
As a rule of thumb you should aim to have enough cash in the bank to pay three months worth of business expenses. There may be times of the year however when you predict a negative cashflow. This is ok provided thatyou can access credit in the form of a short term loan, overdraft or credit from suppliers during those times. Crucially you need to know that this will be followed by a period of positive cashflow so thatyou can repay any short term debts.
If your cashflow isn’t looking too healthy and need a few tips to help improce things, try some or all of tactics
Encourage your customers to pay sooner
- Define and agree your standard payment terms up front – reduce your payment terms from 28 to 14 days if possible for instance.
- Issue invoices promptly.
- Consider offering discounts for prompt or early payment.
- Negotiate deposits or staged payments for large contracts.
Chase debts promptly and firmly
- Set time aside to chase outstanding payments.
- Call on the day your payment is due and keep calling – don’t be embarrassed to chase – it’s your money after all.
- Consider your right to charge penalty interest for late payments.
Change the way your manage your stock
- Consider reducing stock levels and use ‘just-in-time’ ordering – order less stock but more often – it’s likely that your customers will doing this too.
- Maintain good relationships with suppliers and ask for credit terms with those thatyou regularly deal with.
- Lease rather than buy equipment.
- If you know your income follows a seasonal pattern and have evidence of this, agree short term loans and overdrafts when necessary with your bank.
- Look into company credit cards.
- Develop a good relationship with your bank and keep them informed.
Manage you money electronically
- Try to get paid by BACS or electronically so payment go straight into your account and clear sooner.
- Similarly, if you pay electronically, you have more control of when money clears
- Pay cash and cheques in daily.
Let us know how useful our Cashflow Forcasting worksheet is and share your tips for managing cashflow.
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Tags: cashflow, Finances, financial health check