You're in business to make a profit. It's a simple principle, but one that can occasionally become lost amid dreams of building multinational empires worth millions of pounds. You won't be able to stay in business, however, unless you have cash, hence the famous adage: 'cash is king'. There is another saying known as the 'Banker's Mantra' that probably sums up everything you need to remember about financial management: 'Turnover is vanity, profit is sanity, but cash is reality.'
Good cash flow management has always been important, but in this financial climate it is critical. If you are to survive these challenging economic conditions (and there is no reason why you shouldn't - fortunes were still made during the Great Depression) you need to have a very firm grip on your cash.
There will probably be a time lag between your business providing its goods or services and getting paid. This means you have to make sure there is sufficient cash in your company's bank account for it to pay all its bills in the meantime - whether these relate to invoices from suppliers, employees' wages, rent, rates, tax, VAT or anything else.
Even if your business is profitable, there may be times when you are short of cash, because you are awaiting payment for a large order. This is likely to be a particular problem during your first year when you are building up your business and don't have regular cash inflows.
The general principle of cash flow management is that you should speed up your cash inflows (customer payments, interest from bank accounts etc) and slow down your cash outflows (purchase of stock and equipment, loan repayments and tax charges etc) as much as possible.
It can be difficult to affect your outflows other than extending your credit terms with your suppliers, which will often occur on fixed dates in the month and your employees and suppliers might also not take too kindly to you delaying payment to them. But there is more scope for you to improve your cash inflows.
This could mean billing regularly, chasing bad debt, selling your debt to a third party (factoring), negotiating extended credit terms with suppliers, managing your stock effectively (which could entail ordering little and often) and giving your customers 30-day payment terms.
Also, as businesses naturally have peaks and troughs, it is important that you put money away during the peaks so that you can dip into it during the troughs.
It is a good idea to think about investing in some accounting software to help you manage your cash flow. Providers including Sage, Iris, QuickBooks, CCH and KashFlow all provide software that can help you with cashflow analysis and forecasting, so that your business is never caught short of cash in the bank (for further providers, search online). Your accountant should be able to help advise you on which software package to buy.