Yes profit is important but cash is king because while you are waiting to be paid by your clients, and this could take anywhere from 1 week to 2 months, you still have to pay the bills.
Your rent, your suppliers, your staff, replenishing your stock or buying new equipment will not wait, your cash flow is the first thing that will take a hit. Don’t suffer from a short-term cash short fall.
Tips to help manage your cash flow:
* Invoicing – Don’t wait till month end
Invoice frequently. Instead of leaving it to the end of the month, do it as soon as the job is done. Don’t forget some debtors take their own sweet time to pay!
* Go cashless – Do away with folding money
All payables should be done electronically. Whenever possible, use a business credit card for travel, meals and your minor expenses. This leaves more cash in hand and you can defer payment until the end of the month or when it’s due.
* Manage receivables
Monitor your debtors weekly, its ok to send a gentle reminder to late payers, create a pro-forma letter to be consistent. Some people whilst the loveliest clients on the planet are full of excuses for paying late perhaps a late payment fee might motivate them to pay on time!
* Reward clients who pay early
Reward your clients by offering an early payment incentive, that might also help appease any guilt at charging other clients with a late payment fee! You could offer from 2.5% - 5% off the price.
* Be mates with your Bank
Banks can offer businesses useful services like overdrafts or credit, particularly when you are starting out so make sure you keep them in the loop if you think your going to have a cash flow short fall, they need to understand your business and growth potential.
* Make Progress Claims
If you are working on big projects that could carry across over a few months, make sure you get a deposit to start the job and then stagger a 2nd and final progress claim. Set up a payment schedule with your client around the job.
* Create a cash flow forecast
The forecast should tell you who you are paying, when the payments are due, who is paying you and when that money is coming in. A good forecast also sets out all your costs for the month, leaving room as a buffer.
* Keep an eye on your stock
Remember that inventory consumes cash. After all, you have to buy it before you can sell it. Regardless of whether or not you manage to sell it, your vendors don’t care and want to be paid. Put another way, every dollar you spend on inventory is a dollar you won’t have in cash.