Entrepreneurs, this is how to avoid cash flow problems

Financial planning can be easily overlooked by entrepreneurs, which at worst can lead to bankruptcy. We asked experts on how to handle cash flow effectively.

1. Planning is key

Even a profitable business can run into difficulties if cash flow is improperly handled. Bankruptcy is not necessarily related to flaws in a business, but can be due to poor cash flow planning.

‘Research shows that up to two out of three small business bankruptcies in Finland are the result of cash flow issues,’ asserts University of Eastern Finland Accounting and Finance Professor Mervi Niskanen. Similar results have been seen in other countries.

For many entrepreneurs, it comes as a surprise that as the business undergoes rapid growth, they can run out of money as a result of this very growth. This happens if cash inflows and outflows aren’t balanced. To avoid such problems, Niskanen recommends ensuring there are always adequate funds to cover two, or preferably three months’ worth of business expenses, and to keep track of cash flow transactions on a daily basis.

‘Unfortunately, financial planning is neglected by many small companies: expense receipts are sent to the accountant for reimbursement and only then’. According to Niskanen, creating a budget is one of the most effective ways to avoid cash flow issues. The budget doesn’t need to be entirely accurate, but some kind of estimate is good to have so that the entrepreneur is aware of when they can expect to get paid and when they need to pay their own suppliers. Cash flow budgeting makes it easy to account for periods when income may be low or insufficient. By planning ahead, the entrepreneur will be able to negotiate payment terms with a bank or supplier.

2. Identify the risks associated with suppliers

‘In order to succeed in managing cash flows, it is important to be aware of the risks associated with suppliers’, states (acting) Professor of Accounting Hannu Ojala, from Aalto University and Tampere University. ‘Entrepreneurs should carefully examine their suppliers’ annual financial statements and credit rating. This information enables an entrepreneur to assess the solvency of their business suppliers,’ Ojala explains.

3. Outsource where possible

If an entrepreneur is running their business single-handedly, there is a lot to do. However, many things can be outsourced. Both Niskanen and Ojala emphasise the importance of outsourcing.

‘In order for an entrepreneur to be able to focus on their core competencies, they should outsource all matters outside their area of expertise, such as financial and tax planning’, urges Ojala. However, it is necessary for entrepreneurs to be careful about to whom they outsource their financial administration and tax planning.

‘According to a recent study, there are major differences in the quality of financial service providers. A safe option is to use the services of an accountant, whose operations are monitored’, Ojala advises.

4. Make sure payment terms are in order

It is important to ensure that invoice payment terms are in good order.

‘It is worth trying to agree on the longest possible payment timeframe with suppliers and the shortest with customers’, says Ojala. Compliance with payment terms varies vastly between countries.

‘For a long time, Finland has been the exception in that companies almost always pay their invoices by the due date. In other parts of the world, compliance with payment terms isn’t so strong’, Niskanen says.

Ojala has also encountered similar practices, and has found that payments aren’t always made on time in Finland either. ‘In some situations, large companies are unfortunately using their size as a bargaining position to create liquidity problems for small businesses’, Ojala says. When selling services, one should always request a deposit or prepayment, if possible. For example, it is wise for a photographer to request a deposit from a client when booked for a wedding photo shoot for the following summer, or for a restaurateur to require a deposit when accepting a wedding booking.

5. Make invoicing easy

Selecting the right invoicing software can really make life easier for a small business owner. When invoicing is made easy, the time saved can be used for more important things. ‘The customers of entrepreneurs also appreciate easy payment of invoices’, explains invoicing company Zervant’s CEO Mattias Hansson. Smooth invoicing is a clear benefit to entrepreneurs as well. ‘Zervant’s invoicing data shows that the average time for customers to pay an invoice is only two days when they are offered the option to pay by bank or credit card.’ continues Hansson.

Established in 2010, Zervant provides assistance to cash flow management by providing a software that allows entrepreneurs to easily record and invoice for their hours worked. Invoices can then be sent to customers as e-invoices, by post, by email, or simply downloaded as a PDF.

‘By being able to monitor the different statuses of invoices (due, overdue, and paid) in one simple overview, it’s easy for an entrepreneur to proactively identify possible cash flow challenges and then take the necessary measures’, Hansson says.

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