It’s not a lack of profit that kills firms, it’s a lack of cash.
You know cash flow is heading out of control because you aren’t sure where the money is coming from to pay the next set of bills and you’re scrabbling around, trying to borrow in order to keep trading.
Staying on top of your cash flow isn’t always easy, particularly when sales are down or customers pay late. But it’s less of a headache if you operate some basic financial controls.
Here are some suggestions for simple financial controls that every firm should consider implementing.
1. Plan your cash flow
This is all about predicting where your cash will come from, where it’s going, and how much you expect to have in hand at any point in time.
A cash flow plan involves estimating how much money will be coming in and going out every week for the next few months. You’re not looking at sales or purchases, but at receipts and payments, because these can occur at quite different times.
To be effective, a cash flow plan should stretch several months into the future and be updated regularly, at least every few weeks.
2. Keep an eye on debtors and creditors
Knowing how much you owe, and are owed, is fundamental to good cash flow. Make a point of checking the numbers every week, so as to see how they’ve moved. This can reduce the risk of debts going bad, as it will be easier to spot the customers who don’t pay week after week.
3. Approve every purchase and payment
Money could be leaking out of your business through lots of tiny holes, as the firm commits to all sorts of small purchases here and there. Insisting that every purchase must be approved brings accountability to those with the authority to place orders, and could encourage them to think twice before committing to expenditure.
Similarly, a process of approving every payment makes you more aware of where the money is going and reduces the risks of error, or even fraud.
4. Tighten your grip on expense payments
Incidental expenses are another potential drain on cash flow. They’re often necessary, particularly when you have employees travelling, but without a clear and consistent policy, the business could be paying for more than it needs to.
A good expense policy has specific limits for daily expenditure and clear guidance on what is, and is not, acceptable. This needs to be communicated to staff and backed up by rigorous checks and, where appropriate, rejections or at least discussions about excessive amounts being claimed.
5. Lock up the petty cash
The amounts may be small, but petty cash can be another gap in your cash flow controls. If possible, do away with it altogether. If you must have petty cash, ensure it’s checked regularly and that questionable expenditure is investigated.
Explain to employees that your business can’t function without cash. Make it everyone’s responsibility to guard the firm’s bank balance, because it’s in everyone’s interest not to have a crisis which could threaten your future.
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