Today I’m delighted to introduce new Business Plus Baby guest blogger Jonathan Freeman, accountant and owner of Freeman and Co. Chartered Certified Accountants. Jonathan is based in Leicestershire and specialises in supporting small and medium-sized businesses. Over to you, Jonathan…
Whether you are about to start up a new business or have owned your business for several years, managing your cash flow is now more important than ever, especially during these difficult times.
You would be amazed by the number of start up businesses that simply jump in to a new venture without even considering what their likely costs are going to be and what they need to sell in order to just break even. Preparing cash flow and budget forecasts is essential to help plan ahead and see whether there are likely to be any shortfalls. Cash flow forecasts measure the difference between cash inflows e.g. receipts from customers and cash outflows e.g. payments to suppliers and staff.
Most businesses need both short term and long term funding, so let’s take a look at each type and see how this works in practice.
Short term funding
- This type of funding for the start up business is usually made up of small loans provided by the owner. For the established business short term funding is usually provided by customers once sales invoices have been paid within the payment terms. Another form of short term funding can be bank overdrafts. This funding is often referred to as working capital.
Long term funding
- This type of funding for both the start up and established business is often in the form of a bank loan or long term loan provided by the business owner and is used to fund long term financing such as the purchase of plant and machinery.
It is therefore important to ensure that the funding matches the type of expenditure. For example, it would not normally be a good idea to finance expensive plant and machinery using an overdraft facility as this would work out quite expensive and also not provide the necessary security which a fixed bank loan could.
Cash flow management can be difficult to manage especially where customers are taking longer and longer to pay. Here are a few tips to help smooth this process along:
- Always carry out credit checks against all new customers where possible;
- Agree and formalise payment terms;
- Issue sales invoices promptly;
- Chase debts promptly and firmly;
- Keep stock levels down;
- Manage payments to suppliers carefully;
- Provide customers with your BACS details;
- Formalise your debt collection procedure and ensure consistency using standard letters and reminders;
- Agree when to stop supplying customers who have overdue invoices outstanding.
The key to managing cash shortfalls is to become aware of the problem as early and as accurately as possible and your accountant should be able to help you with this. Banks are often wary of borrowers who have to have money ‘today’. They’d much prefer lending to you before you need it, preferably months before. If banks are unwilling to lend to you, contact your suppliers to see if they can extend their payment terms to help in the short term.
You can read more about Jonathan by visiting his website www.freemanco.net