Bad cash flow is the ultimate cause of every business failure.
Keep your company safe by being aware of the biggest risks to your cash:
1) Losses – these will consume your cash like nothing else. Good forecasts will make sure you always know when losses are likely and you can plan to fund these losses properly.
2) Bad debts – you can’t protect yourself completely from bad debts. Strict and regular credit control is a must, and you MUST make sure you get the debtors report every week so nothing creeps up on you. Always credit check new customers and keep your biggest customers on credit watch. You could take out bad debt insurance. Some find this too expensive, but could you afford the loss if one of your largest customers didn’t pay? There are some really flexible ways to insure bad debts these days.
3) HMRC payments – far too many companies get into trouble over this one. Follow this one rule – VAT, PAYE and corporation tax are NOT part of your working capital. It’s not your money. Put your tax into a reserve account and leave it there until the tax is due. This goes for personal tax bills too. If you need to use HMRC’s money to fund your cash flow then there is something wrong with your business.
4) Buying toys that won’t bring more sales in. You know: the smart new car and expensive office refits. The smart businesses only spend on things that bring in more sales.
5) Growth – this one takes so many businesses by surprise. Surely growth is a good thing? Well yes BUT if it’s not planned it will eat all of your cash and put your business in serious danger. Why? Growth inevitably means needing more stock, debtors will go up as you sell more to customers, your overheads will probably go up before the increased profits come in to cover them, you might be paying out deposits on machinery and equipment and taking out new finance agreements. Growth MUST be planned and you must know where the money is going to come from. It’s a naive mistake to assume the bank will back you