“Cash … is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent” — Warren Buffett

When done properly, good cash-flow management gives you the ability to be more decisive and make important business decisions faster, and more effectively.

So, what does effective cash flow management look like?

Step 1 — Have a cash flow forecast
Small businesses need to have a rolling six-month forecast which shows month cash inflows and outflows. Use Pareto’s Principle here — focus on the 20% of customers and suppliers that cause 80% of your movements. Don’t ignore the smaller amounts, but best to avoid getting too detailed otherwise this will take too long to update and it won’t get done.

The key here is getting yourself into good habits and keeping it updated — this is more achievable if the task is easier to perform. A less accurate cash flow forecast is still better than no forecast at all — and the more you practice the better you’ll get.

Step 2 — Have cash-flow processes and policies
Just having a forecast isn’t going to be enough — fact. You also need to think about your internal business processes and the way you’re going about things to stay on track.

Have a process for chasing payments, and stick to it – A documented procedure will allow you to quickly hand this task over to someone when it’s ready for it. It may sound like overkill, but if it’s not routine and really easy to do — chances are it won’t get done.

Make it easy for your customers to pay – Billing errors, confusing invoices, and bad process here can all lead to customers refusing or deferring payment. Offering direct debits, early payment discounts, and various payment options also help. Aim to take as much friction out of things for your customers.

Have a credit policy – If you extend credit to customers then you should have a clearly defined credit policy so they know your payment terms and interest charges for late payments. Set the tone early with new customers, if you haven’t chased someone for 90 days after their first payment was due, you’ve set a precedent for future invoices and caused yourself a problem.

Require part payment upfront for larger orders – If you’re taking on a large contract, consider requesting an upfront payment to fund your initial costs of the job and protect your cash flow — bake this into your contractual terms. Terms should also be clearly defined for remaining payments for the rest of the job.

Invoice quickly – You work hard for your money — so as soon as the job has been completed send your customer the invoice and set out the payment terms. It’s always a good idea to ask them when sending the invoice if there are any reasons why they can’t pay within your terms.

Build a cash reserve – Luck happens when preparation meets opportunity. Opportunities are bound to come along in the world of business, having the cash to enable you to capitalise on them is important. If you’re willing to make short term sacrifices, cash flow in the long term will take care of itself.

The other advantage of a cash reserve? It will ensure your business against downturns in the economy and allow you to forge ahead when others are struggling.

Growth can suck up cash flow – You need to be strategic about growth, as it requires strong cash flows to fund and can cause issues. Opening a new part of the business or winning a new customer could fuel long term growth leading to increased profits, but may lead to a short term credit crunch. Working with accurate forecasts will help you make better decisions, and highlight which decisions are likely to most impact cash.

Conclusion – Cash flow isn’t a dark art only practised by accountants. It’s something you can create simple business processes around, and manage well without a huge time investment. The consequences of not managing cash flow can lead to short term pain, stress, and missed growth opportunities.

James Watson