One of the major concerns faced by entrepreneurs is undoubtedly cash flow. All too often, these entrepreneurs err on the side of optimism, confusing certain operating items. It's this confusion that traps them, even with good profitability. Whether beginner or experienced, cash flow problems are a spectre that haunts entrepreneurs. How can you anticipate cash flow problems?
To anticipate cash flow problems (cash available in the bank or on hand to cover operating expenses) and carry out strategic actions, a few best practices are essential:
1- Draw up a 6-month cash flow forecast
This cash flow plan lists, month by month or fortnight, all your upcoming cash receipts and disbursements. It enables you to easily visualize the evolution of your cash flow and react in time in the event of a cash shortage.
2- Don't be too quick to self-finance your equipment purchases....
If you see that you're in danger of running into cash flow problems, adopt a simple rule: preserve your cash flow by immediately ceasing to self-finance the capital goods you need. "Any asset with a lifespan of more than one year must be financed, and above all must not be bought for cash! Whether a company needs to acquire software, a company car or any other piece of equipment, it must systematically think in terms of rental, credit or leasing.
3- Negotiate a loan with your banker
This type of solution obviously implies a relationship of trust with your banker. If you're going to negotiate an overdraft line, the best thing to do is to do it before you actually need it. If you negotiate an overdraft line in advance, you'll be glad you have it when a cash flow problem arises.
4- Review the payment terms granted to your customers in relation to your suppliers' payment terms.
Whether you're a service provider or a merchant, you need to protect yourself against the risk of non-payment. The best way to do this is to ask your customer for a deposit on order or delivery. Ensure that your customers pay you within a shorter period than your suppliers. Key customers and suppliers: find the right arguments and try to negotiate shorter payment terms with your key customers, and longer payment terms with your suppliers.
5- Give up margin for cash
This is a normal situation, as there is no direct link between profits and cash position: a company can very well have a profitable income statement and find itself in suspension of payments due to a cash shortage. To anticipate liquidity problems, you have to accept a temporary loss of margin in order to gain cash.
Kosga Hinsou Kevin, Entrepreneurial consultant and business coach.
