Cash Flow Management for Small Business

For any small business the availability of cash and a healthy cash flow in the business is probably one of the most important elements. As the business owner, its crucial that you manage both the money going out and of course the money coming into the business. To often as entrepreneurs we are just so thankful to be making sales that we will happily be giving both discount and credit to those kind enough to be purchasing out products or services. If you are selling products, you may as well be asking people to take your money and hope they are in the position to give it back at some point in te future. Of course their are also a number of other key cash flow practices necessary in small firms to ensure first of all existence and hopefully later growth. We will be looking at the issues involved in this in  te rest of the article.

What is cash?
Cash flow is the measure of your ability to pay your bills on a regular basis. It depends on the timing and amounts of money flowing into and out of the business each week and month. Good cash flow means that the pattern of income and spending in a business allows it to have cash available to pay bills on time.

Your available cash includes:
coins and notes
money in current accounts and short-term deposits
any unused bank overdraft facility
foreign currency and deposits that can be quickly converted to your currency

It does not include:
long-term deposits (if these cannot be withdrawn)
money owed by customers

Difference between cash and profit
It is important not to confuse cash balances with profit. Profit is the difference between the total amount your business earns and all of its costs, usually assessed over a year or other trading period. You may be able to forecast a good profit for the year, yet still face times when you are strapped for cash.

The importance of cash
To make a profit, most businesses have to produce and deliver goods or services to their customers before being paid. Unfortunately, no matter how profitable the contract, if you don't have enough money to pay your staff and suppliers before receiving payment from your customers, you'll be unable to deliver your side of the bargain or receive any profit.

To trade effectively and be able to grow your business, you need to build up cash balances by ensuring that the timing of cash movements puts you in a positive cashflow situation overall.
But bear in mind that having a lot of cash in your bank does not necessarily make good business sense. If you do not need to use it immediately, put spare cash into an account where it will earn a higher rate of interest, or use it as capital for short-term investments.

Cash inflows and cash outflows
Ideally, during the business cycle, you will have more money flowing in than flowing out. This will allow you to build up cash balances with which to plug cashflow gaps, seek expansion and reassure lenders and investors about the health of your business.
You should note that income and expenditure cashflows rarely occur together, with inflows often lagging behind. Your aim must be to speed up the inflows and slow down the outflows.

Cash inflows
Payment for goods or services from your customers.
Receipt of a bank loan.
Interest on savings and investments.
Shareholder investments.
Increased bank overdrafts or loans.

Cash outflows
Purchase of stock, raw materials or tools.
Wages, rents and daily operating expenses.
Purchase of fixed assets - PCs, machinery, office furniture, etc.
Loan repayments.
Dividend payments.
Income tax, corporation tax, VAT and other taxes.
Reduced overdraft facilities.

Many of your regular cash outflows, such as salaries, loan repayments and tax, have to be made on fixed dates. You must always be in a position to meet these payments in order to avoid large fines or a disgruntled workforce.
To improve everyday cashflow you can:
ask your customers to pay sooner -
chase debts promptly and firmly -
use factoring -
ask for extended credit terms with suppliers -
order less stock but more often - see our guides on
lease rather than buy equipment -
improve profitability -

You can also improve cashflow by increasing borrowing, or putting more money into the business. This is suitable for coping with short-term downturns or to fund growth in line with your business plan, but shouldn't form the basis of your cash strategy.

The principles of cashflow forecasting
Cashflow forecasting enables you to predict peaks and troughs in your cash balance. It helps you to plan borrowing and tells you how much surplus cash you're likely to have at a given time. Many banks require forecasts before considering a loan.

Elements of a cashflow forecast
The cashflow forecast identifies the sources and amounts of cash coming into your business and the destinations and amounts of cash going out over a given period. There are normally two columns listing forecast and actual amounts respectively.

The forecast is usually done for a year or quarter in advance and divided into weeks or months. In extremely difficult cashflow situations a daily cashflow forecast might be helpful. It is best to pick periods during which most of your fixed costs - such as salaries - go out. The forecast lists:
excess of receipts over payments - with negative figures shown in brackets
opening bank balance
closing bank balance

Note that all forecast figures must relate to sums that are due to be collected and paid out, not invoices actually sent and received. The forecast is a live entity. It will need adjusting in line with long-term changes to actual performance or market trends.

Accounting software
Accounting software will help you prepare your cashflow forecast, allowing you to update your projections if there's a change in market trends or your business fortunes. Planning for seasonal peaks and troughs is simplified and you can also make 'what if' calculations. Most banks require profit and balance sheet forecasts as well as cashflow. Many accounting packages will assist with preparing these documents.

Manage income and expenditure
Effective cashflow management is as critical to business survival as providing services or products. Below are some of the key methods to help reduce the time gap between expenditure and receipt of income.

Customer management
Define a credit policy that clearly sets out your standard payment terms.

Issue invoices promptly and regularly chase outstanding payments. Use an aged debtor list to keep track of invoices that are overdue and monitor your performance in getting paid.

Consider exercising your right to charge penalty interest for late payment.

Consider offering discounts for prompt payment.

Negotiate deposits or staged payments for large contracts. It's in your customers' interests that you don't go out of business trying to meet their demands.

Consider using a third party to buy your invoices in return for a percentage of the total.

Supplier management
Ask for extended credit terms. Giving your suppliers incentives such as large or regular orders may help, but make sure you have a market for the orders you're placing.

Cashflow problems and how to avoid them
No matter how effective your negotiations with customers and suppliers, poor business practices can put your cashflow at risk.

Look out for:
Poor credit controls - failure to run credit checks on your customers is risky, especially if your debt collection strategy is inefficient.

Failure to fulfil your order - if you don't deliver on time, or to specification, you won't get paid. Implement systems to measure production efficiency and the quantity and quality of stock you hold and produce.
Ineffective marketing - if your sales are stagnating or falling, revisit your marketing plan.

Inefficient ordering service - make it easy for your customers to do business with you. Where possible, accept orders over the telephone, email or internet. Ensure catalogues and order forms are clear and easy to use.

Poor management accounting - keep an eye on key accounting ratios that will alert you to an impending cashflow crisis or prevent you from taking orders you can't handle.

Inadequate supplier management - your suppliers may be overcharging, or taking too long to deliver.

Poor control of gross profits or overhead costs - assess where you can cut costs.
Consider outsourcing non-core activities such as payroll services. Review your utilities contracts to see whether it is possible to reduce costs by switching tariff or supplier.

Using your cashflow forecast as a business tool
A cashflow forecast can be an invaluable business tool if it is used effectively. Bear in mind that it is dynamic - you will need to change and adjust it frequently depending on business activity, payment patterns and supplier demands.

It's helpful to set up a regular review of the forecast, changing the figures in light of your sales, purchases and staff costs. Legislation, interest rates and tax changes will also impact on the forecast.
Having a regular review of your cashflow forecast will enable you to:
see when problems are likely to occur and sort them out in advance
identify any potential cash shortfalls and take appropriate action
ensure you have sufficient cashflow before you take on any major financial commitment

Using a cashflow forecast to avoid overtrading
Having an accurate cashflow forecast will help ensure that you can achieve steady growth without overtrading. You will know when you have sufficient assets to take on additional business - and, just as importantly, when you need to consolidate.

It is important that you incorporate warning signals into your cashflow forecast. For example, if predicted cash levels come close to your overdraft limits, this should sound an alarm and trigger action to bring cash back to an acceptable level.

Ideally, you should always have a contingency plan, such as retaining a minimum amount of cash in the business, perhaps in an interest-earning account. This 'rainy day' money can be used to meet short-term cash shortages.

Refinements to a simple cashflow forecast
There is no single best way to set out a cashflow forecast. However, some refinements to the most basic ways of setting out the information will give you a more sophisticated view of your business' situation.
You could, for example, separate cashflow for business operations from funding cashflow. This gives a clearer picture of the actual performance of your business and is a format that many accountants prefer.

Cashflow from operations

Includes inflows such as:
cash sales
receipts from credit sales in earlier periods
interest on savings

Includes outflows such as:
payments to suppliers
hire purchase and lease payments
expenses - rent, rates, insurance, utilities, telephone, etc
taxes and National Insurance contributions
interest on loans and bank charges

Funding cashflows
Includes inflows such as:
loans from banks
increase in share capital

Includes outflows such as:
dividends paid
loans repaid
With these two types of cashflow separated you can gauge how self-sufficient the day-to-day working of your business is. A net outflow in operational cashflow is usually an indicator of problems that need to be addressed quickly.

Sales for start-up's: why it will make or break your business?

Often overlooked in both the minds and business plan of an entrepreneur, sales is what will bring revenue into your business. For that reason it seems odd that you will invest time, money and effort into a business for which you have not planned to sales process and strategy. If you look at the more successful businesses out there today, one thing will be clear, sales will be at the forefront of what they do.

Prior to starting the business marketing research will focus on what type of product/price/delivery combination will result in the most sales. During the growth stages of your business once again, projected sales and the strategies involved in increasing this in such a way that the business will grow will be at the heart of the choices made in the business. Yes of course product/service quality is important and yes of course your clients need to become return buyers by treating them right and giving them the support they need, but at the end of the day, sales will define if the business survives and grows.

At my first company, we had four or five sales reps who’d been around since the early days. They intuitively knew how to position the company and how to sell the products; they didn’t need (and we didn’t have) sales materials or pricing strategies.

We then increased the sales staff to about 10, and even hired an manager of global sales and marketing. Because he was a big-company sales exec, he was very critical of some of the missing tools at my company. He pushed for more standardization of pricing, marketing collaterals, sales processes, etc.

He told me, “There’s no standardized way for me to on board new people. There’s no way for us to easily roll out changes to pricing, positioning relative to competitors or new sales tools. We need standardized tools to arm our sales teams with the information they need to effectively do their jobs, and we need to better aim them at the right opportunities.”

I was stuck in startup culture, and he was stuck in big-company culture. There was a chasm between us that couldn’t be bridged. But he was right about one thing: We needed to change as we grew. I think this happens at a lot of startups. Like my company did, startups get stuck in this middle ground where process and tools become more important.

This is the first in a three-part series in which I’m going to talk about some of the scaling issues startups face. In this first post, we’ll talk about aiming your sales staff at the opportunities most likely to pay off.

Review every deal in your sales pipeline.

Very early-stage startup people are used to rigorous prioritisation, and they need to apply this same approach with the sales deal pipeline. I did this through regular pipeline reviews.

In order for a deal to be forecast in the current quarter, the sales team had to have done four things:

    * Identified a champion on the team
    * Identified a budget holder with money to spend
    * Presented the customer with an ROI (return on investment) calculation of the benefit of using our product
    * Determined the customer was in an active review of choosing a supplier of document and collaboration services (the product we offered).

By having the salesperson walk me through each deal, I could often tell when he couldn’t defend having the deal be listed as an “A deal” (and thus have a high forecast percentage). When I got busy and only had time to review spreadsheets or output from Sales, it was impossible for me to know which deals were “real.” The reason, I learned, is that many salespeople take meetings with customers who are willing to meet them and give all the right messages. But many of these people they’re meeting with are NINAs (no influence, no authority), and thus, aren’t qualified.

Qualify, qualify, qualify your sales leads.

Inexperienced salespeople spend too much time with people who are nice to them and talk a good game about being interested in their products, but don’t have the budgets. I learned this the hard way. Either we’d have deals that seemed stuck (for example, they were in the “closing within three months” pipeline for nine months), or we’d have sales reps who constantly kept adding new deals and taking out the old “sure deals” that never closed.

The most experienced sales reps were the ones who knew the three most important things to do with a sales lead were to qualify, qualify, qualify. Lead quality matters, because the most scarce resource for a sales rep is time, and no matter how much you want to sell your products, you can’t push them on a customer who isn’t ready to buy. They might have other initiatives, budget constraints or just need more time to evaluate your space. As the best sales leaders will tell you, “you have to align a company’s sales cycle with a prospect’s buying cycle.”

Aim for the A deals.

After the sales rep walks through the deal, management has to step in and help with aiming. As the company grows, this task can be shared between the Sales manager, Marketing manager and the business owner/manager.  Part of this is standardizing the assignment of territories, industries and accounts, but part is focusing efforts on the most likely sales.

“A” deals — those that have a realistic shot of closing in the next three months — should get much of the sales person’s time (say 66-75 percent). “B” deals, forecast to close in 3–12 months, should get the remainder of sales reps’ time. Each sales rep needs to build their pipeline with these, and many bigger deals take time. However, the key to scaling is that “C” deals — deals that are unlikely to close within 12 months — get no time from sales. Marketing should own those.

Let marketing nurture the C deals.

Marketing has two roles in managing pipelines. First, they need to fill the top end of the funnel with new “qualified” leads (e.g. converted from “suspects” to prospects). Second, they need to manage C deals. Today’s C deals are obviously tomorrow’s As and Bs.

So the best-run companies have marketing running activities, such as the following, to nurture their C deals.

    * Newsletters. One of the goals of newsletters is to keep your company and its products in the consciousness of your suspects or future buyers. C deals go in the newsletter bucket and should be identified as C-deal newsletter companies. The information you send them should be different from the newsletters you send to existing customers, for example.

    * Customer events. It’s far easier to get potential customers interested in your products when they hear actual customers talking about your products and how they are using them. Suspects and prospects are often in search of success stories from their peers to hear how they’re improving internal operations. So one of the smartest things we did at Sales was run “city tours,” in which we had our existing customers talk about how they were using our products and had our product management teams talking about future innovation and development. Customer events are a great way to market to your C deals to keep them informed and try to raise their interest levels

    * PR. Some companies are excellent at PR, and others don’t put much effort into it at all. I think PR is an incredibly important activity for technology companies, but most companies aren’t very good at it. (I wrote a post recently about how to better manage journalist relations.) The reason many companies don’t put enough effort into PR is that PR doesn’t have an immediate translation into sales. It’s mostly a “C deal” activity.

    * Analyst relations. In many technology fields, analysts are hugely influential in determining enterprise budgets. I sometimes find it funny, since 73.6 percent of all statistics are made up, but the truth is, many analysts are great and help customers frame the decisions they need to reach. Spending time with analysts and getting into their “innovator quadrants” will help you manage your C deals and pull them forward to Bs and As. This is obviously a marketing and CEO activity.

Starting a business: it takes more than just an idea.

It all starts with a great idea and in may ways that is the crux of it, the idea really is just a start. I'm often surprised as to the amount of new entrepreneurs being extremely precious over their ideas. Yes of course there may be merit in this if you have come up with a new technology or invention but nine times out of ten the idea is out there. The key element of business success is not so much the idea or the business plan, but the various processes, the people and the commitment that goes into the business becoming a success. Give the same idea to 10 people and only one or two will make a success out of it. If you have a look at the way Richard Branson and his Virgin group of companies have created success then its mostly the way that they took existing ideas and added value to it.

Your business may be based on a hobby or skill, but to make it a success you need a market big enough to support it. Research potential markets thoroughly from the very beginning.

In addition, joining business forums will help you network and grow your customer base. Social networking sites, for example, are becoming an increasingly popular means of reaching out to new markets in order to find new clients.

It might sound obvious, but it is important to know what it is that you offer. There will be countless competitors around the globe eager to service your customers. You should also be thinking about positioning yourself in and around their territory. What is your unique selling point? What can you offer to make your business more attractive than your competitors? Put yourself in the shoes of a potential customer - why should your target audience buy from you? To grow smoothly and stand out from the crowd, you need to know what makes you different from the rest.

Base your prices on what people are prepared to pay, not your costs. Add value to what you provide wherever possible. Remember that, while everyone likes a bargain and customers want as much ‘bang for their buck’ as possible, few people associate bargain basement prices or free offerings with value. Equally, they are unlikely to want to buy in bulk at exorbitant prices.

Knowing the price your competitors charge and bettering them is key to you retaining existing customers, as well as attracting new ones. Charging more than what your market can afford will only mean what you provide will be harder to sell.

Taking your product or service to market is never a one-off task. In order to secure and successfully grow sales and orders you must continually approach potential customers without alienating them.

A famous quote has it that advertising “works 50% of the time - the trick is to work out which 50%”. It is crucial to adopt a strategic approach to advertising. Think of your target markets: which publications do they read? What television and radio programmes do they consume? Think laterally - where do they socialise? Who do they talk to? Work out the answers to these key questions – and of course decide on your budget – before planning an advertising campaign.

With PR, there is always the possibility of achieving publicity in local and even national newspapers and trade magazines. However, this is dependent on you having a good story. Understand what journalists (even business journalists) want. Don’t try and pass off a thinly concealed or obvious product promotion for your business as a story. Reporters are a savvy bunch. Your press release will be deleted or binned and you will quickly get a bad name.

Ask yourself: what is the real-world problem being solved or made better thanks to you and your company? What are the political, commercial and economic threats or barriers that get in the way?

The benefit of proactive PR over direct advertising is cost. It can be much less expensive, even if you employ a PR agency or consultant. The downside is that you do need to make more of an effort to be relevant. As well as general news stories, you can also consider writing expert columns. These may not be of interest to the print media at a time when paginations are well down, but there are many websites that will readily take well-written and credible articles.

With the emergence of the internet as a major force in new media, having a website is one of the cheapest, most cost effective ways to grow and promote your business. Even if you cannot afford a fancy website, a single page with your contact details is better than nothing. To repeat, social media and online networking are increasingly being seen as invaluable ingredients in the ‘marketing mix.

Your drive, commitment and determination to succeed as an entrepreneur is in many ways 90% of what will make or break your business. Find something that inspires you and make you come alive, assign the necessary commitment, drive and energy to it, understand your clients needs and what will make them buy and you will find that half the race is won already. Enjoy!

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