How to make your business cash positive

Your business needs to be cash positive to succeed. And there’s an important by-product of positive cash flow – you’ll have a much better night’s sleep!

Positive cash flow means that you have money available to run as well as grow your business.

Negative cash flow means you don’t even have enough money to run your business let alone grow it.

It is vital that you pay attention to your cash flow every day. So, let’s look at some practical ways to help improve it.

STEP 1: ASSESS YOUR CURRENT SITUATION

As a first step, it’s important to assess the current cash flow position within your business. It’s important that you ‘know your numbers’ – one of them being cash flow. Having a system in place to check your cash flow in real-time on a regular basis is vital.

You may be surprised to know that tracking and knowing your numbers will put you in the minority of business owners.

It’s no coincidence that on the television show Dragon’s Den, one of the Dragon’s biggest frustrations is business owners and entrepreneurs not knowing their numbers.

Checking cash flow on a regular basis includes asking some hard questions. For example, what money do I have coming in this week? What bills do I have to pay? Is there going to be a problem later in the week when more has been paid out than is coming in?

The advantage of up-to-date cash flow management is that you know where you stand cash flow wise. Also, you can begin to take the steps necessary to either get or stay cash flow positive.

THE CALCULATIONS YOU NEED TO DO…

• Work out the amount of cash coming into the business each month. For instance, if you run a consultancy business and have four clients who each have a monthly invoice of £5,000, that means your total revenue is £20,000 per month. Unfortunately, one client hasn’t paid your invoice yet. As a result, cash coming into the business for that month is £15,000.
• Calculate your cost of sales and your operational costs. For example, your consultancy business may have £5,000 in cost of sales, in addition to which there are operational costs such as salaries, rent, telephone bills etc. of £10,000. So total costs for the month are £15,000.
• Calculate any other expenses, such as loan payments. Let’s say for example, you have a business loan costing £1,000 per month.
• Calculate whether you are cash flow positive or negative. In this example, for the month you have a total of £16,000 going out in costs, expenses and loan repayments, but because one client hasn’t paid their invoice yet, you’ve only had £15,000 coming in. Which means, at the end of the month, the business is cash flow negative. This is because your total expenses are £1,000 more than the amount of cash the business actually received that month.

CASH FLOW MANAGEMENT

These calculations are a straightforward exercise in cash flow management. The exercise does not have to be over-complicated and an Excel spreadsheet will do the job perfectly.

Depending on the size and trading volumes of your business, this exercise may have to be carried out monthly, weekly or in some cases even daily.

STEP 2: INCREASE REVENUE

It sounds obvious, but increasing revenue is a great way to improve your cash flow. Taking a fresh look at new revenue streams is more important than ever. Covid-19 is creating a challenging trading climate, so you may need to consider pivoting your business to find new ways of increasing revenue.

There are countless books, podcasts, seminars and online courses on the topics of sales and marketing. Become a regular consumer of such information. They will give you some great ideas on how to increase sales and therefore revenue.

STEP 3: ENSURE CLIENTS PAY ON TIME

A report in November 2018, described research carried out by Xero, the cloud accounting software provider. It estimated that, at any one time, 78% of small businesses are awaiting payments for longer than the agreed payment terms, which are typically 30 days. In other words, late payments are a big issue for small business owners.

Perhaps start by reviewing your credit control procedures. What could you change or improve? Could you consider making changes to the way you operate the business? Could you ask for a proportion of the total revenue due as an upfront payment before you start work?

When it comes to chasing payment, send polite but firm reminders. And don’t be afraid to pick up the phone.

We in the UK aren’t great at talking about money, far less asking for it!

However, I’ve always found that an open and frank discussion with a client or customer helps manage the expectations of both parties when it comes time to pay.

Always remember, you’ve done the job, you’ve provided the goods or services. You deserve to get paid.

STEP 4: BUILD A BUFFER

During the months when you are cash flow positive, put some funds aside for the times when business might be slower, or for instance, when you’re waiting for payment of a large invoice to come in.

As a guide, work out your monthly operating expenses and look to try and gradually build a buffer equivalent to a minimum of three months’ worth of operating expenses. One day, you’ll be glad you did.

In the early days, when Bill Gates and Paul Allen were growing Microsoft, they made a conscious decision to make sure they built a sufficient cash flow buffer into the business. If it’s good enough for Microsoft…

STEP 5: REDUCE COSTS

Are there ways you could reduce the costs within the business? Take a long, hard, realistic look at your business expenses.

Perhaps you’re spending too much on rent. Review your situation. Could you operate just as effectively from smaller premises? Or, as many are finding at the moment, could you work just as effectively from home without an office.

Are you spending too much on utilities – telephone, gas, electric, mobile phones? It soon mounts up. See if you can negotiate better deals.
Essentially, examine all your business expenses. Look at ways to reduce your costs without affecting your business. I guarantee you’ll uncover some unnecessary expenditure that you’ll be able to reduce.

STEP 6: DON’T FORGET ABOUT HMRC

PAYE, Self-Assessment, VAT, Corporation Tax. They all need to be paid.

But don’t wait until a week or so before the tax bill is due and then start trying to work out how you’re going to manage to pay your £12,000 tax bill. That really will play havoc with your cash flow.

Instead, put monies aside each month to cover future tax bills. If you’re not sure how much to put aside, ask your accountant.

But remember, don’t then view these funds as ‘rainy day’ money you can dip into when cash flow is a bit tight. Strictly speaking, funds you’re putting aside for tax don’t belong to you – they belong to HMRC!

FINALLY:

As business owners, we’ve all experienced the ‘cash flow headache’.

As you are probably only too aware, cash flow is vital for both the survival and success of any business. Therefore, part of your job as a business owner, is to take a long hard look at your business and see how you can effectively manage your cash flow.

It will enable you to deal with the current requirements of the business more effectively, while also helping you not only survive, but hopefully plan for future growth.

Not only that, but a business that’s cash flow positive, does wonders for both the sanity and sleep of the business owner!

However, if you have added up the numbers and feel you might face potential cash flow challenges in 2021, what should you do? Perhaps it might be time to consider speaking to your bank again to see if they can help. Or maybe contact a good commercial broker for expert advice.