The two most important things to consider when it comes to financial health are profit and cash flow. A business can be making a profit but not be able to generate sufficient cash to meet its needs. On the other hand a business with sufficient cash reserves might actually be unprofitable and depleting its reserves.

Small business owners juggle many roles and functions and whilst they’re all important, good accounting and bookkeeping habits are the foundations of long-term success. You may have very skilled staff, a strong order book and a winning marketing programme, but a lack of liquidity will destroy your business very quickly.

Business owners need to be aware of their profit and cash flow positions at all times and regularly monitor key business operations so remedial action can be taken quickly.

1 Know what’s in and what’s out

Failure to keep on top of your costs and out goings will spiral into a serious problem for businesses of any sizes. A loose rein on these will harm your profit margin very quickly.

As an absolute minimum, businesses need three tracking tools: a profit and loss statement, a balance sheet and a cash flow statement.  It’s surprising how many businesses don’t have them. Take time to create and maintain these, and if you don’t know how, learn or employ someone who does. Very simple accounting software is widely available and makes the process easy and manageable.

2 Improve receivables

Make it an objective to improve the speed you turn materials and supplies into products, stock into receivables and receivables into revenue.

One instant fix is asking for a deposit at the time an order is made. This will put extra money into the pot, meaning you’re not out of pocket for very long. Make credit checks a requirement for non-cash customers too. If you’re an invoiced based business, run credit checks on potential clients before contracting to do the work.

Put in place the right processes to get invoices out on time and, wherever possible, paid on time. Make use of contracts and late payment penalties and ultimately get savvy about working with people who are going to pay you.

3 Balance your stock

Many small business owners err on the side of maintaining too much stock. Whilst you’ll never have to worry about anything being out of stock, it demands a great portion of your cash flow. To keep your stock at the right level and improve cash flow know your average stock investment period, ie the average time needed to convert the money invested in your stock into sales.

Keeping stock levels high will take its toll on your cash-flow - maybe time for a rethink?

4 Have cash reserves

Having cash reserves is a vital safety net and adding between 15%-50% to account for cash balance variations is advisable, or six months of reserves.   It’s also wise to make a list of possible unplanned events and assess the financial impact they could have on the business, reflecting the percentage chance of them happening.

5 Be lean

If margins are slipping, don’t just aim to boost sales, stabilise or decrease expenses.  Ask yourself, do you really need it?  Can your business run successfully without it? If the answer is yes, then hold off buying it and budget it for a later date.

Regularly review expenses with the objective of reducing them. For example, keep an eye on contract renewal dates. Although staying with the same suppliers offers a sense of security, you may be able to get a better deal from a new company or convince existing suppliers to lower their price.

Other easy reductions can be made by cancelling service contracts that add no value, outsourcing services, and no cost social media marketing campaigns

6 Utilise management information

Understand the important indicators in your business and monitor them regularly. Income and cash flow are of course key indicators, but there are others that will give you early warning signals on how you’re doing, such as customers through the door, website visits, average spend, payment times by customers and how and what your competitors are doing.

Create a dashboard and longer term key performance indicators. Don’t wait for the till or order book to be empty before you act because it will be too late.

7 Know who your best customers are

Not all customers are equal; some earn you a lot of money, many make you some money and some actually waste your time. Know what kind of customers are best for you, who they are and focus on them; use your resources wisely.

8 Identify sources for back up funds

Growing businesses regularly need money for stock, raw materials or services, but do your research into funding sources before you are desperate. Banks move slowly and although alternative finance sources can make lending decisions quickly and advance the money within hours, it’s better to have done the research into the best options for your business model beforehand.

An internet search will throw up a myriad of providers and independent portals that will signpost you to the most appropriate funding sources.  Sources include the Alternative Business Funding Portal, Fundinglive and Business Finance Compared.  Alternatively find a broker through the  National Association of Commercial Finance Brokers.

Paul Mildenstein is CEO of alternative small business funder Liberis