Managing your cashflow effectively – our top tips

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Keeping an eye on your cash flow is vital for maintaining the health of your business

Cashflow is the number one thing to get right when starting up a business. Even some of the best business ideas can fall flat because there isn’t enough money to keep it going, let alone growing.  Indeed a staggering 90% of small business failures are due to poor cash flow.

There’s no doubt that cash flow is the lifeblood of a business and the cornerstone of business growth. Without cash coming into your business it’s impossible to meet all of your financial obligations from paying your taxes, through suppliers, to employees and yourself. Businesses that manage cash, wealth and capital well tend to be more profitable in the long run – coping better with economic cycles, building greater resilience, and ultimately enjoying more success.

You can be a profitable business, but if your cash flow is not well managed you could find yourself struggling to pay for what you need to keep going. For small businesses it is a good discipline to get into from the start, as it reduces stress, helps you plan for the future, and shows your lenders and advisers that you have control over your business.

Managing your cash flow is all about figuring out when you’re going to have cash in your hands, figuring out how to get more of it in your hands faster, and how to manage your spending so you don’t run into cash flow problems. Read on find out top 10 tips to improve your cash flow.


What is cash flow?

Cash flow is a measure of the amount and timing of cash coming into and being paid out of your business each week. It is a snapshot of your actual cash position at any given time. You need to balance the timing and amounts of your costs and income in your business, or you will quickly run into problems. A business with good cash flow will create a pattern of income and spending which allows it always to have enough cash available to pay bills on time.

Cashflow is different from both turnover (which is the total amount of revenue you generate) and profit (which is your revenue minus costs) because cash flow is specifically about the amount of money you have available to spend now. It also considers money coming in from all sources, including loans and investments, rather than just how much money you get from clients.

If you have a positive cash flow, your business will be able to settle its bills and invest in growth. A negative cash flow means you’ll need to find an alternative source of income to be able to pay off debts.

If you want to work out your net cash flow, you just add up all of your cash payments over a set period (typically a month) and take that away from your cash receipts. It’s important not to get too hung up on one particular month, however. Your cash flow can be more accurately judged over a period of three months or more since most businesses will, naturally, have peaks and troughs.

While your turnover might be a nice big number that gives you confidence that your business is doing well, it’s the cash flow that offers a better insight into how well your business is managing. As the old saying goes – “turnover is vanity, profit is sanity and cash flow is reality”.


Why is cash flow so important?

Managing cash flow effectively is what keeps small and medium sized businesses afloat.  If you have more money leaving the business than coming in this is called a negative cash flow. This isn’t good if it continues for a prolonged period of time. In essence your business is consuming more money that it makes. This means you’ll start to eat into any reserves you may have. Eventually this can lead to closure.

On the other hand, positive cash flow is where more money is coming in than going out. You’ll have the financial means to keep your organisation running. You’ll be able to cover monthly expenses such as rent, taxes, and other accounts payable. A healthy cash flow may even enable you, in time, to invest in the business to fund expansion.

Start-up businesses that are in the beginning stages of the business life cycle will also likely be seeking funding. Early implementation of cash flow management policies can make the difference between a successful or failed fund raising. Having a firm handle of your cash position will demonstrate to investors a clear sense of financial acumen and fiscal discipline.

If you’re looking to expand your business, then maintaining a positive cash flow is essential. Transitioning from the start-up stage to scale-up will require you to have plenty of funds to hand in order to make the necessary investment in people, offices, systems and controls, IT, and software that come with growth.

Cash flow difficulties can have severe knock-on effects, such as making you late paying tax bills and incurring fines from HMRC. In the worst cases, they may even result in your business folding despite being highly profitable on paper.

Every business needs to remember that money isn’t money until you have it in your hand. New and smaller businesses are especially vulnerable to cash flow problems, as the monthly income may be unreliable and may sometimes be lower than your outgoings. You therefore need a strategy to manage and improve your cash flow to avoid your business becoming insolvent.


Our top 10 tips for improving your cashflow

Failing to monitor and manage your cash flow properly puts your business at risk and could lead to a range of different problems. Here are top 10 solutions for improving your cashflow and preventing associated problems.


1. Forecast your cashflow

Cashflow forecasting enables you to predict peaks and troughs in your cash balance. It helps you to plan how much and when to borrow and how much available cash you’re likely to have at a given time. Not only can you reduce the risk of cash flow problems, but you can also gain the confidence you need to make longer-term plans. A cash flow forecast need not be just a warning to take care; it can provide reassurance that you will be able to afford your more ambitious business goals, and show you what you need to do to prepare for them.

Your forecast should include confirmed sales and the sales you think you will have, against which you put your costs to produce the product and your overall business costs.

These costs should be split into different categories:

  • The cost directly related to the sale like commission payments, delivery charges, materials, packaging
  • The costs that are fixed such as rent, rates and salaries including national insurance and pension contributions
  • Variable costs like marketing, phone bills and utilities
  • Exceptional costs like equipment you need to buy
  • Tax and bank fees like loan repayments, national insurance and corporation tax.

Forecasts are helpful as they allow you to see how the number of sales you make affects your total outgoings and when you will need cash to cover your costs, and how much you’ll need.


2. Price your services properly

When you first start out, it’s tempting to under-price yourself to bring in more business. Whether you’re underestimating your expertise or the value of your products, or you’re simply trying to lure in customers, low prices can have the opposite effect and harm your cash flow in both the short and long term. It’s also difficult to increase prices significantly when you start at a low level.

Do market research and price yourself competitively. If customers or clients do quibble the price, be ready with reasons why you are different from your competitors. Or leave wiggle room in your quoted price to come down without injuring your margins.


3. Invoice your customers as soon as possible

The instant you complete the job send an invoice – every day you delay is a risk to your business. There are lots of good apps out there that will let you do this quickly and easily.


4. Keep on top of late payers.

Clients will typically try to delay payment for as long as they can – the larger the client, the more they feel they can get away with this. This can put a great strain on your cash flow, especially if the larger clients account for the bulk of your revenue. With key clients like this, try negotiating early payments in exchange for a small discount.

No start up wants to turn down business. But what’s the point in spending time and effort on work that you never get paid for? It can be difficult to know whether a client is or isn’t likely to pay, but a little research can go a long way. If it’s a business, look it up on Companies House to make sure it’s legit and its finances are in order.


5. Stick to your payment terms

When agreeing work with clients, you should always agree payment terms first with a written up contract. Without this, it’s much more difficult to chase payments, and you would have difficulties if you decided to take legal action without hard evidence.

Include details on when you’ll invoice them and expect payment, ways they can pay, who you’ll contact for payment and who they should contact with any queries they may have. With clear payment terms in place, no one can pretend they weren’t sure about the payment.

Also, people and businesses that are happy to pay are usually happy to put down a deposit too. You could request 25% or 50% upfront, or ask them to cover the cost of any materials upfront. Not only will this ensure you have enough cash to cover immediate outgoings, but it can also help to protect your cash flow should they default later down the line.


6. Actively manage your outgoings

On the other side of the coin is the question of how late you can pay your suppliers. There is no harm in asking for a review on terms. If you’re a good customer, pay on time and you have a solid relationship you may find you can move from 30 to 60 days and ease some pressure.

No one loves debt, but it’s something business owners have to get comfortable with. If you pay invoices straight away, you might find yourself getting rid of the vital cash you really need. Holding onto it until other payments come in can really help you keep the cash flowing nicely. BUT that doesn’t mean you can constantly make payments late. Make sure you stay within the payment terms to avoid burning vital bridges you need to succeed.

You should also constantly monitor whether you are getting the best price for your materials. If you can get the same quality for cheaper elsewhere then either switch, or discuss the difference with your current supplier. Everything you do to reduce your costs, however small, is beneficial to cashflow.


7. Mange your stock effectively

If you suddenly receive high demand for a product, it’s tempting to order a high volume of material to service that demand. However, if that demand then changes you could be left with far too much stock and, potentially, debt from ordering the materials. Ordering too much stock might also leave you lumbered with materials that become obsolete and difficult to sell.

Unless you are anticipating a sudden massive order, try to keep only as much stock as you are likely to need before the next delivery window. This is the principle behind ‘just in time’ (JIT) manufacturing, to avoid tying up lots of cash in stock that merely sits around waiting.  If you need to buy in stock that exceeds your cash flow, trade finance (a form of short-term business credit) can be an option.  Tracking this information through an inventory will help you quickly spot when stock is going to waste, enabling you to cut down on unnecessary expenses.


8. Offer your customers easy ways to pay

Forget cheques. Even online bank transfers can be hard and give customers an excuse to wait to pay. When your aim is to collect money, it doesn’t help if there are payment barriers in place. Offer flexible payment options by accepting cards, bank transfers, PayPal, Direct Debits and cash (if appropriate for your business).

You should also make your payment details easy to find. Make sure customers are clear on your prices before you hit them with a bill they don’t expect. And if you send clients invoices, include the bank details so they’re easy to find.


9. Monitor, chase and even ban

Lots of businesses have online systems to help with keeping track of invoices and payments coming in. They’re a good way to know where you stand with cash, and they can save you time in looking through spreadsheets trying to find one missed payment. Ideally, you should be checking this daily, so that you can quickly start to chase a payment when it’s overdue.

Keeping an eye on late payments will also help you spot clients who are regularly paying late or not at all. You might want to consider banning them from your books if they’re causing a headache.


10. Keep a war chest

Business, like life, is unpredictable. It’s prudent to keep a war chest handy with money you can use in an emergency such as a flood at your premises, a staff member going on long term sick, or a client going bust. Indeed, setting aside cash can also help you through busier trading periods too.


The Growth Hub can help you manage your cashflow

At the Growth Hub, we have business advisors who have years of experience in finance (working in the private and public sectors) and many of them have started and grown successful businesses themselves. They can advise you on all your financial questions for your business, including how to improve your cashflow.  Also, if you need a cash injection for your business, our grants programme can help, where you can apply for a grant of up to £30k.

You can get 121 support from a business advisor, who can also help you with a grant application.  It is all completely free as part of our new Start and Grow Programme. Click here to find out more or fill in our really simple form to register your interest and one of advisors will be in touch to see how we can help. The programme runs until the end of June – so make sure you get the boost your business needs.

Taking time to organise your cash flow is well worth the effort. You’ll be better off both financially and emotionally if you are always in control.  Knowing your business cash flow is not only a good thing for the future growth and expansion of your business, but it will also provide major insights into your business’s financial state, and where money coming in and going out of the business.

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