Are you having trouble with your business' budget and cash flow? Use this guide to help you track the finances of your business, to forecast cash flow, and to discover how keeping good financial records can help you combat future financial problems. This article showcases eight useful tips on how to deal with business expenses.
In a small business the business owner should be the first to know if there is not enough money in the bank to pay the bills. The better able you are to anticipate a cashflow crunch ahead of time (and make suitable plans) the more your lenders will respect your business skills. What they won’t respect is you rushing to them for aid in the midst of a cashflow crisis. In other words, your management needs to be proactive, not reactive.
Use cashflow forecasts as your prime method of anticipating tricky cashflow periods. By looking ahead you’ll know when to put money aside to meet future needs and when not to withdraw money from the business. For example, January and February might be the slowest months for your business, yet several large bills might fall due in these months. By planning ahead, you can put money aside (or make borrowing arrangements) well in advance to meet your commitments.
Good cashflow management is essential for all businesses. It allows you to monitor the level of debtors and creditors, which invariably leads to better control of your cashflow. Keeping your books up to date is often overlooked when the economy is stronger and business is flowing in briskly, but this oversight can catch up with you in both good times and bad.
One of the benefits of good record keeping is that you can predict and smooth the fluctuation of your business’s cashflow. Firstly, try to predict the total amount of money coming into your business over a specified period, for example, over the next quarter. This requires forecasting sales for the period, and then estimating the average dollar amount collected for 15, 30, 45, 60 and 90 days, as well as accounting for bad debts. Secondly, predict cash outflows over the same period; using sales forecasts, estimating the timing of material costs and other production costs.
Once you have predicted cashflows, you can develop a cashflow forecast with a variety of best and worst-case scenarios for payments by looking at the first (discounted) date for variable payments and then the last date before penalties. Then add your regular recurring payments to the forecast, for example, wages, rent, and power. You can now forecast cash availability by adding projected payments to opening cashflow and subtracting variable and recurring expenses.
If the result of this exercise is not as rosy as you might have expected, there are some actions you can take:
* Tighten your collection efforts to bring cash in more quickly. Invoices should be prepared and mailed daily and any resulting queries followed up immediately. All outstanding debtors need to be followed up to ensure payment and that credit terms are adhered to.
* You could ask major debtors to help out by paying their bills by credit card (a business credit card if they have one). They still get up to 50 plus days of credit, and you get your money earlier (less the credit card commission).
* Avoid drawing funds for private use during difficult periods.
* Consider a sale of slow moving stock to generate funds quickly.
* Negotiate an overdraft facility with your bank, but avoid staying at the peak of your overdraft limit for long periods.
* Using outside credit may help, but borrowing is best used to help your business achieve its long-term goals rather than as working capital.
* If a cash crisis does occur despite your best efforts, it’s important to inform your bank and creditors before payments are due. In the case of creditors, you could make a part or progress payment that demonstrates your good faith and intentions to settle your debts.
* Most importantly, don’t allow a lack of cash or poor profitability stop you from obtaining professional advice when you need it.
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