Dec 152011

1. Don’t panic.  2 Follow this advice

One of the biggest causes of business failure is a lack of cashflow.  It might seem strange but many profitable businesses fail.  Why?  Because they didn’t manage the flow of cash into and out of the business.  This is especially acute when a business is going through a period of growth.  Here are a few ways to avoid becoming another statistic.

Running a small business isn’t a black art – you deliver a product or service to someone who pays you for it; in the meantime you pay others for what they have provided for you.  All you need to do is balance things so that more money comes in than goes out and the money coming in arrives before you need to pay out.

The best way to avoid running out of cash is to keep a cashflow forecast.  Sounds simple but in my experience most businesses don’t do it.  The forecast doesn’t need to be overly elaborate when you start (you will naturally refine it as you get more understanding of it later); it just needs to show when and where you expect all bits of cash to be coming into the business and where you expect it to be going out.

The next best way to avoid a cash problem is to always chase your debts and those who owe you money.  Some business owners are afraid to chase debts as they think it might annoy customers.  This is your livelihood we’re talking about here.  If a customer usually pays on time but then doesn’t pay one month then it’s one of two things.  Either they forgot/made a mistake, in which case they won’t mind you reminding them.  Alternatively, they’ve got cashflow problems of their own so you need to know about it and be a little more aggressive.  If you’ve got customers who regularly don’t pay on time then you need to get rid of them.  Pass them on to a competitor and let them worry about it.

The third thing to do when you see a potential problem arising is tell people.  Tell the bank manager, tell the tax man, let your suppliers know.  Explaining to everyone early shows that you’re running a good business and have identified a potential issue early so that all have an opportunity to respond in a measured manner. Everyone hates surprises and if you’re able to manage the situation positively you will come out of it so much better.