Cash flow is a perennial problem for growing businesses, and the larger your company, the more this seems to be the case.
According to an SME Finance Monitor, 43 percent of companies that needed funding in the final quarter of 2023 did so for cash flow-related reasons, compared to eight in 10 during the pandemic.
Removed If more cash flows out of your business than comes in, you may struggle to pay suppliers, bills and employees and ultimately risk becoming insolvent.
But closing the financing gap is not the only or even the best solution to cash flow problems. You should also consider preventative measures such as effective cash flow management.
Here are our top tips for managing cash flow more effectively.
Update your cash flow forecast
As a growing business, your finances are constantly changing. This is why it’s important to maintain a current cash flow forecast, which should give you a detailed overview of income and expenses and help you understand whether you have enough working capital to meet your short-term obligations.
It’s easy. All you have to do is:
- Select a period to cover –From a few weeks to a few months, the more data you need and the shorter the time period, the more accurate it will be
- List your income –Start with sales and include everything from tax refunds to investments and grants
- List your expenses –Rent, salaries, inventory, taxes, bank fees and marketing expenses
- Calculate your current cash flow –minus your net expenses from your net income, which shows you whether you’re spending more than you’re making (negative cash flow) or making more than you’re spending (positive cash flow).
- Update it regularly –An accurate cash flow forecast helps you plan for the future and identify problems before they occur
If you’re struggling with this, contact an accountant.
Reevaluate and renegotiate
Now that you have a good overview of your cash flow situation thanks to your forecast, you can identify opportunities for improvement.
Don’t be afraid to open a dialogue with your customers and see if you can renegotiate payment terms, especially if you’ve been too lenient in the past. And remember: if a company doesn’t pay you on time, you’re entitled to be charged statutory interest of 8 per cent plus the Bank of England’s base rate.
If you know you will have difficulty making your upcoming payments, you can negotiate more favorable terms with a supplier. The most important thing is to stay ahead of the situation instead of letting it spiral out of control and ruin professional relationships.
reduce costs
Your cash flow forecast will, in turn, come in handy in identifying areas of your business where you can make cost savings. Cost cutting doesn’t necessarily have to mean impossible decisions and sweeping changes to your strategy — it can be as simple as switching to a cheaper supplier, reducing marketing spend, or postponing plans until you’re more liquid.
Conduct a regular health check of your business expenses and assess what is effective and necessary.
Monitor energy consumption
By keeping track of how, why and when your business uses energy, you can reduce unnecessary consumption and incorporate your energy bills into your cash flow forecast.
The easiest way to monitor energy consumption is to install a smart meter. Smart meters automatically send accurate gas and electricity readings to your energy provider via a smart data network. When you get a smart meter reading, you can see how much energy you are using and how much it is costing you in near real time.
Everything you need to know about smart meters for your business – A smart meter is more environmentally friendly and can save your business time and money – here’s how to get it
Use finance
Late payments are one of the main causes of cash flow problems for businesses. Fighting this late payment culture can be like banging your head against a brick wall, but financing can give you the flexibility to continue investing and growing while you wait.
With invoice financing, you can release between 85 and 95 percent of an unpaid invoice immediately upon receipt. After payment you will receive the remaining amount minus a small fee. You can choose between invoice discounting, which remains confidential as you retain control over payment collection, or invoice factoring, where the provider collects the outstanding payment for you.
Or if you are an importer or exporter, you can take advantage of trade finance, which helps reduce the risks of international trade. Trade finance is an umbrella term for a variety of financial instruments, but essentially, once an order is confirmed, exporters can receive a payment advance and importers can receive a loan to fulfill the order.
Remember, your ability to secure this type of financing depends on healthy cash management. Do this right and use financing to give you flexibility.
Have a backup plan
This depends on you knowing your company. Determine how large your emergency fund should be and stash it away as quickly as possible. This can be a lump sum or a regularly paid percentage of your income.
Additionally, identify the essentials you need to run your business during difficult times. Decide how much you need to allocate to each part of the business – think rent, energy bills, payroll, suppliers and other areas you may want to include. Which ones would take up a larger share of your limited resources? Consider this when creating a backup plan. Remember, just like your regular cash flow, this contingency plan should be reviewed regularly to give you flexibility.
For more information on the benefits of installing a smart meter in your workplace, visit Smart Energy GB at smartenergyGB.org.
This article is part of a paid information campaign for Smart Energy GB.
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21 Cash Flow Management Tips –Improving your cash flow focuses on two fundamental goals: controlling your expenses and regulating your income. To this end, there are a number of clever tactics that can allow you to explore expansion opportunities and reduce the risk of being left behind in the event of an unexpected event
