Just in case you are unsure, cash flow is a term used for money flowing in and out of a business. Good cashflow keeps a business alive, but poor cashflow can kill it, so that’s why I thought you’d like to hear about some of the most common cashflow issues businesses experience and how you can try to avoid them.

1) Incomplete, or inadequate bookkeeping.

Ok, so lets be honest. For most business people, doing their bookkeeping is not why they went into business. They understandably have a millions of things to do so bookkeeping is bit of a hassle, and all to often done at the last moment. But, if your books aren’t organised, troubled times may lay ahead.

For example, a busy painter and decorator client always had jobs booked, he charged a reasonable rate, but couldn’t understand why he didn’t have enough money in the bank and keep needing to extend his overdraft to cover his bills.

On closer inspection of his accounts it became clear his books were very disorganised. He reconciled his bank account so infrequently, that he hadn’t realised due to invoicing errors, several large contract invoices hadn’t been paid several months after the jobs were finished.

Investing in a cloud based accountancy system and getting his accounts organised mean’t he could easily track which invoices were outstanding at anytime and he could be on top of what cash he should be getting in when.

2) Bad Debts.

Bad debts are amounts owed by customers that are very unlikely to be recovered. Bad debts can be crippling for any business, but particularly for new businesses just starting out.

That makes it very important to put procedures in place for collecting money owed by its customers. We always recommend to clients that such procedures should be a priority when starting out.

It can be as simple as setting aside a time to send out reminder emails/letters, or phone calls to establish why your invoices haven’t been settled and if the problem is something you can help rectify.

To reduce the likelihood of bad debts, it maybe prudent for some of clients to conduct credit checks on their customers before commencing on any work for them. If the checks reveal a customer has a poor credit record. You may need to ask for a deposit up front or issue partial invoices they can pay as portions of the work as they are completed.

3) Credit terms.

If the credit terms you have set your customers are out of sync with the credit terms set by your suppliers, negative cash flow can build up which will worsen over time.

For example, if your customers have 30 days to pay you but your suppliers want to be paid within 14 days then a cash flow problem may build up.

In this situation, the best thing to do would be to try and renegotiate terms with both your customers and/or suppliers. Another option to explore could be to offer early settlement discounts as a financial incentive to your customers. For example a 2% reduction on the total invoices value if it is paid with 14 days.

4) Profit.

Maybe the most obvious, but definitely worth mentioning. If your business is making a loss, then this will not be sustainable indefinitely.

Losses need to be examined:  Essentially losses need can addressed in a two prong attack.

• Revenue growth strategies need to be employed ie, increasing your prices or your sales volume.
• And/Or, gain control of your spending and identify potential cost saving, ie reducing your overheads like changing energy supplier to reduce your electricity costs.

5). Cashflow forecast

We believe a cashflow forecast is essential for new businesses. This is something a good bookkeeper can create for you.

With a cash flow forecast, you’ll be able to see which months you can expect to see a cash deficit (more cash out than cash in), and which months you can expect a surplus (more cash in than going out). You’ll also be able to get a good idea of how much cash your business is going to require over a particular period of time, which means you can talk to your bank about a loan or overdraft if needed.

I’d love to hear from you if you have cashflow issues, so I can tell you how I believe I could help you and your business.

Goodluck.