44% of SMEs across the UK face cash flow problems, many of which are caused by late payments and poor cash flow management. Too many business failures are caused by a lack of liquidity and could be averted if SMEs managed their cash smarter.
To manage cash flow thoroughly, forecasting cash flows is essential. It enables SMEs to respond better to future questions and challenges such as preparing for a possible rise or fall in sales, calculating whether the company can afford more employees or determining whether it will have funds available to bring a new project to the market next quarter.
Cash is like a tide, it comes in and it goes out. It is not always necessary to panic when it is out but it is crucial to know when and how it will come back in.
To have a positive net cash flow, cash inflow has to be larger than expenses.
Seems simple, but in reality there are multiple factors to be taken into account. To help you with your cash flow troubles, this guide will provide you with the 10 most useful tips on cash flow management.
Create a cash flow budget and set cash flow goals
- Make well considered cash flow predictions. Make predictions for the next months, the next quarter and the next year. The longer term predictions should be adjusted as time goes by.
- Be conservative – Always expect to get paid later than expected and add in at least a two-week buffer to the expected payment date of earned revenue.
- Figure out your burn rate (i.e. how much does it cost to keep your business running for a month?) and set goals to reduce it if necessary.
- Improve your decision making process by always taking into account your budget plans.
Monitor your cash flow
- Don’t be mislead by your financial statements – they are important but alone they are not enough to determine your business’ health. Look at your cash – in depth and often.
- Use your budget to measure success and failure against it: Monthly or weekly examine whether you are staying in line with your budget. If you are not, find the cause and make corrections either to your budget or to your business plan (or both).
- Map out your monthly expenses on a calendar to see peaks and troughs – identify times when cash outflow > cash inflow. This can occur when quarterly VAT accounts, instalment and supplier payments or similar are due around the same time.
- Train an employee (for example the office manager) to monitor your cash flow on a daily basis so you always know how much actual cash you have in the bank. S/he should be given thresholds so when cash falls below a certain level, you will be notified.
- Track your cash flow indicators.
Have a plan B before you need it
- Have a line of credit or loan set up before you need it. Unexpected events can disrupt even well managed cash flows and getting finance once you actually need it will take too much time.
- To prevent surprises when it comes to invoices, you can use services such as invoice discounting or factoring which allow you to receive funds against your outstanding invoices.
- Do your research on what is available on the market. As you are organising your plan B before you need it, you will have time to make thought-through decisions rather than rushed ones, so take your time.
- Organising finance during good times will give you a stronger position in any negotiation compared to when you are desperate for money.
- Consider alternative finance like invoice finance. You could also look into peer-to-peer lending to find alternative financing opportunities.
Receive cash faster
Offer discounts to clients who pay within 10 days and ask for a down payment when you take on big projects.
Ask to pay your suppliers on terms
Stretch your money to build your business. Sometimes there is a fee or an increase in the product cost for the option to pay on terms. Consider this – even though you would be paying more for the service or product, if you come into cash flow trouble without having revenue problems, this might be a good solution.
Don’t pay everything at once
It is tempting to sit down with all your bills and write all the checks at once. You can continue to do so, just do not send them all at once. Mark each check with the date you should mail it for it to arrive on time and not crash with another check.
Alternatively, you can sort them into categories such as due now, will become relevant soon and not relevant for a while. Then send checks in batches rather than having one big outflow of cash a month.
Make use of accounting software products
They allow you to analyse your cash flow situation in real time and to keep your cash flow predictions and realities organised at all times.
Monitor stock levels
Inventory is cash tied up, so aim to reduce stock levels.
Reduce late payments and their impact
One of the main reasons why companies run out of cash is because they are not being paid on time and feel too worried about ruining client relationships to chase payments. However, it is essential for small businesses to receive payments on time so you should chase any clients who are late for payment.
Be aware of your statutory rights in case of late payments
In the UK you have the right to interest and compensation for late payments.