Cash flow problems can cripple a small business and is one of the top concerns for business owners. Late payments and missed invoices are all too common for small businesses and can cause major problems.
Here are 5 practical ways to implement effective cash flow management and grow your business.
1. Be proactive rather than reactive
Start by looking at your current method for managing money coming in or going out of your business, such as payroll, bills, purchases and investments. A reactive cash flow plan is common in many businesses unfortunately. Either burying your head under the sand, or not knowing how critical it is to manage this element of your business from the start. A proactive approach will ensure you know what is on the horizon in the months to come, enabling you to plan financial requirements efficiently and have your funds organised. This puts you in a stronger position to get funding and can minimise the chance of financial emergencies. Of course, you can’t plan for everything, but this will give you a realistic indication of your financial health.
The same applies for money coming into your business. Issue your sales invoices in a timely manner or get the money upfront. If you are late to issue invoices, you can’t blame clients for paying late. Use automated payment methods with your clients to make getting paid easy, so you can spend less time chasing invoices and more time running your business. This is so much easier when you are set up properly with a decent software such as Xero.
Do you have a system for tracking payments?
Have you agreed on clear payment terms when signing new clients and contracts?
Are the terms in your billing process too lenient or not clear?
Do you have a process in place for chasing late payments? Can someone else do it for you?
2. Use and update your cash flow forecast
An up-to-date cash-flow forecast is essential, particularly in a growing business. It's important to understand the amount of cash and working capital required to operate your business - and this can change. It might be that your forecast has changed dramatically due to losing a major client or a large spend on products. There is no need to go heavy on the detail, but make sure you cover the key aspects of your business. Ideally your accountant will create this for you and help to keep it in check, ensuring that you understand the numbers and the impact decisions have on cash flow.
Stocking up ahead of a busy trading period? Review your stock and work-in-progress levels. How much capital do you have invested in inventory?
Engaging with new suppliers, or have contract renewals? Review your contractual agreements such as costs and payment terms, and factor these into your forecast so you don’t have any unexpected outgoings. Don’t forget to issue sales invoices in a timely manner.
Made changes to your business model? Check the figures and see how this impacts your numbers. For example, you might have increased staffing costs if you’ve expanded your online distribution or you’re offering new services.
You should update your plan and forecast regularly – ideally quarterly. Check in frequently to review and evaluate your progress against the plan.
3. Review, Reassess and be Realistic
Take an honest look at your business. Regularly checking it's health to see how the numbers behind your business look is a good habit for any small business owner, especially ahead of busier trading periods.
Whether it’s discussing terms with clients and suppliers, assessing your workforce or reviewing your costs, you can stay alert by being aware of what’s coming in and going out of your business.
As your business grows, you may start to face a new set of challenges, such as investing in more raw materials and stock, moving to a larger premises or hiring extra staff. At this point, you may need to weigh up your funding choices to grow your business further.
4. Be flexible
A solid financial plan can ensure your business stays as flexible as possible. You’ll be well-prepared to capitalise on growth opportunities or cope with unexpected shifts in the market.
Flexibility gives you a competitive advantage. For example, it may allow you to bring in additional inventory, update equipment or extend payment terms without damaging your financial health.
It’s always a good idea to have some cash in reserves. If things are going well, it might not seem necessary now, but some cash tucked away for a rainy day is always useful. Try the simple 1/3 rule: one-third for taxes, one-third for dividends, and one-third left in the business.
5. Consider using cash flow finance
Cash flow finance can reduce your upfront capital expenditure so you can better balance your books and avoid being left short. From taking advantage of new opportunities and investing in new products or services, to bridging short-term funding gaps, cash flow finance is a great option for increased flexibility.
Before looking for external capital, you should make sure you’re managing cash effectively with our tips above. Being able to demonstrate good cash management sends out the right signals to potential investors or lenders. Here are two common examples of cash flow finance and how they can help your business. Purple Accounts will help with all aspects of small business financing as Certified Funding Advisors with Capitalise. This is much easier and flexible than a bank, yet not many business owners realise this is available to them.
Trade finance is a common external source of cash flow finance for businesses that import or export, but you don’t have to be selling globally to benefit from this short-term credit. It’s for anybody who trades and experiences a delay between selling your goods and receiving the cash for those goods.
Invoice finance lets you take control of your cash flow quickly and easily. You typically receive up to 85% of the value of an invoice immediately, which can help to ease cash flow worries. The funder will collect the money owed from your invoices, and pay you the balance, less any fees.