Maintaining a steady cash flow is key to the survival of any business, especially a small or medium-sized company. Even for a thriving business, not managing your cash flow properly can cause problems and result in a lack of cash to fund day to day running costs or growth.
Controlling your expenditure, turning your sales into cash and protecting your credit record are the essential goals of improving the flow of cash through your business. So, taking time to plan and assess your financial needs and to understand the issues that affect cash flow is a good place to start.
Getting on top of your finances and tightening up on your outgoings is also essential in managing your cash flow. Where can you afford to cut costs? How frequently do you pay suppliers, tax bills, staff or utilities? Can you pay by instalments to make terms more flexible or negotiate more favourable deals? Reducing unnecessary expenditure will improve your cash flow position. Furthermore in these times of heightened fraudulent payment activity, having systems in place to avoid a payment being made in error is extremely important.
Prompt settlement of your invoices
It’s widely acknowledged that one of the biggest threats to cash flow that SMEs face is late payment and, despite Government efforts to tackle the issue, it seems to be an increasing problem. Emma Jones, founder of business support network Enterprise Nation, thinks more needs to be done: “We need to see a complete culture change. Paying small firms late needs to be made socially unacceptable”.
There are ways of alleviating the problem yourself by having a good credit management process – send out invoices promptly, ensure they are received and not disputed before due date and be quick to chase bills immediately they become overdue. It’s also a good idea to make sure your suppliers know your payment terms from the outset – 30 days is standard, but not essential – why wait that long? Getting to know your customers’ payment dates will help you spot irregularities or delays in good time. You should also run credit checks on your most important customers to make sure you’re not negatively impacted due to their bad management. Invoice factoring and invoice discounting are also options to ensure that your invoices are converted into timely income.
Keep a cash flow forecast – set targets for the next six to 12 months to keep track of finances and avoid any shortfalls. Prepare a cash flow forecast in the form of a simple spreadsheet listing all income and costs at least on a monthly basis. Remember to take account of seasonal variations, irregular items such as VAT quarters as well as fixed and variable costs. Monitoring market conditions and being aware of customers and suppliers who may be in trouble will help to anticipate potential problems and allow you to minimise your exposure to financial loss.
Accessing cash when it is running short is another headache for many SMEs. If your business is growing quickly and needs money to meet its payments, such as payroll before it collects debts from customers, or if your company is hitting temporary problems, securing funding is not always quick or easy. So it’s beneficial to stay on good terms with your lenders.
Keeping them informed of unplanned outgoings or changes in forecasts on a timely basis means they’re more likely to look favourably should your business need future financial assistance. And the more time you can give yourself before hitting a crisis the more likely you are to have the option of other providers and not just your existing lender.
If banks are unwilling to lend to you there is light at the end of the tunnel with more funding options available than ever before. Crowd funding, peer-to-peer lending, equity investment, grants, Government finance schemes and business angels are all credible sources of alternative funding and well worth investigating. Adam Tyler, NACFB Chief Executive, explains: “Many businesses are completely unaware of the breadth of lenders that are out there, and often limit themselves to high street banks. The right finance is out there. It’s a matter of knowing how to access it”.
Get some expert help
Maintaining a healthy cash flow is integral to the survival of any business but many management teams and business owners struggle with the time and resources to maintain a cash flow analysis. To help owners audit their current position, EFM has designed a Cashflow Healthcheck – it’s quick and easy and will give you a clear indication of the financial health of your business
Click here to access our 3 minute Cashflow Healthcheck which will give you a quick indication of the financial health of your business
And for more comprehensive advice, EFM’s team of experts offers an impartial and no commitment service. We can build an accurate cash flow model for your business, which will put you in control, alert you to potential issues and help you implement effective solutions. Contact us for a free one-hour consultation.