When you first start a business it’s easy to not think about boring things like cash flow. You are too busy trying to market yourself, get new work through the door, and actually do the work.
I have also worked with, and read about, many small businesses over the past few years and one of the main reasons for the success or failure of a company always comes back to one thing – the amount of cash you have in the business.
It’s crucial to set rules and objectives from the outset when it comes to cash flow. If you are selling Services or high price products then you need to fight for a maximum of 30 day payment terms from customers.
It can be difficult in the beginning as some companies will have the attitude of if you want our business then we have a policy of 90 day payment terms. Some customers might even default on payments or delay them. I have had customers who after 60 days sent me an email to say they need to freeze all payments for another two months.
However over time as your business grows you will have more power to determine payment terms and pick the customers you know will pay on time and within a reasonable time-frame.
Next up is to get yourself a good piece of software that will enable you to keep track of who owes you what and when they should be paying. Get into the habit of checking a week before payment day to contact people and check all is ok, they have all the right details and the payment date is still relevant.
You also need to have a plan in place to start saving up cash in the business as soon as you can. As soon as I could afford to pay myself more - I didn't, I kept a basic wage and started to save money inside the business. I wanted to have a buffer to help me through tough times. This is especially important in the Service industry where you can suddenly have no work and need to cover costs and a basic salary (and your employee’s salary if you have any).
Whatever your total monthly expenses are for everything (including salaries) then you should aim for three times this. At the end of the day, Cash Flow is a very tough thing to build up, but it will be the best thing you can do for your business in the early days.