Cash flow is essential for the long-term running of your business, especially if you want the potential for growth and ongoing resilience. Without adequate cash flow, you run the risk of falling into debt, failing to meet your financial commitments, and disrupting productivity.
Due to the importance of cash flow, and its consequences, it is key for any business owner. This means implementing the correct procedures to help you to manage and continually improve cash flow.
Below, we have listed our top tips for managing cash flow and why it’s so essential to do it well.
Why does cash flow matter?
There are many reasons why good cash flow is critical in any business.
Firstly, having cash readily available enables you to meet your financial commitments, including paying for supplies and bills, covering staff salaries, repaying loans, etc. This means you have access to the resources you need to maintain productivity, meet customer demand and run your operations.
Good cash flow allows you to build reserves by syphoning off any excess profit. This will leave you with rainy day funds to utilise if you find yourself in a bind or need to reinvest elsewhere.
On top of this, cash flow fuels growth. Often, expanding your company requires an upfront investment that can place pressure on your finances, especially while you wait for the rewards of increased revenue to kick in. By managing cash flow effectively while growing, you can minimise the strain and allow a smoother transition.
Finally, not having sufficient cash flow brings risk to your business. You may quickly find yourself unable to meet payments – such as a scheduled direct debit – which could end up leaving you in debt. If your cash situation does not improve, the issue may spiral – leaving your business in circumstances it can’t bounce back from.
Our top tips
Now you know the importance of having good cash flow, it’s time to take steps to maintain and improve it continually. We have listed our top tips below.
Get your invoicing right
A common source of cash flow problems is your customers not paying on time or even avoiding payment altogether. The average SME is chasing five unpaid invoices at any time.
To eliminate the risk of this happening to your business, you need to have an effective process that sets expectations for your customers and removes barriers to payments.
Firstly, you need a reliable invoicing service that sends invoices on a timely basis. An automated process should support this – you can even set up reminders. You will also need to provide accurate payment details and clarify what the recipient needs to do next, alongside a strict payment deadline.
If you still find yourself chasing invoices, it might be time to reflect on your credit management processes instead.
Have good credit management processes
Credit management processes refer to the steps you take to ensure payment and how you react when it does not happen.
Examples of credit management may include introducing late payment fees to act as a deterrent, conducting customer credit checks, or requiring deposits. It will also involve understanding your final port of call – for example, taking the customer to court or sending a debt collection agency on behalf of your business.
It is vital to balance trusting your customer with protecting your business when determining your credit management protocol. Remember to communicate the process with customers so that they are fully aware of the consequences of non-payment, so there are no surprises.
Ensure your accounting is accurate
To determine your cash flow, you need to ensure your accounts are up to date and accurate. This means constantly reviewing data from your company, such as income versus expenditure, and translating this into a reliable cash flow forecast.
Make sure you have a skilled and responsible person in charge of maintaining your accounts regularly so that you have a realistic forecast at any time; this may be an internal employee or an external bookkeeper or accountant.
The benefit of accurate accounting information is that it will enable you to uncover the state of your business finances and raise any red flags ahead of time. This allows you to promptly address cash flow when needed.
Keep your personal finances separate
Every entrepreneur is committed to the success of their business – and, as such, it can be tempting to put your own money into the business. However, this can easily confuse your accounting.
Aim to keep your business finances separate from your personal. This will ensure your business accounts solely reflect the state of your business cash flow, rather than any of your own money you loaned the business to plug a gap. With this insight, you can focus on improving your business finance and eliminate the need for this support.
It will also separate you from any business debt.
Build cash reserves
While the goal should be to have a consistent cash flow in your business, there will inevitably be occasions where your cashflow takes a hit – for example, to cover unexpected expenses or address reduced income.
However, a temporary change in cash flow should not derail your business, provided you are in an otherwise healthy position. Part of this includes having adequate cash reserves, built up over time from your profits (and due to good cash flow).
With these reserves, you have funds to fall back on, even when cash is restricted, ensuring your survival.
Stay on top of costs
It’s natural for costs to fluctuate over time. However, if you don’t keep track, it’s hard to notice creeping expenditure until it’s too late.
Conducting regular expense audits is recommended to help you stay on top of your business costs. This matters for two reasons.
Firstly, monitoring rising costs gives you accurate insight into how much you spend each month. From here, you can examine whether your processes are cost-effective or if pricing model changes or other amendments may be required.
Secondly, by knowing where your costs have changed, you can determine areas where expenses can be trimmed. This may include shopping around to find more competitive deals or eliminating unrequired costs.
By understanding your costs, you can take steps to keep them to a minimal level, which will support your cash flow.
Use cash flow solutions
When you experience poor cash flow, it’s vital to act before the problem worsens. Fortunately, many external financial solutions can help. By understanding the options and how they can help you, you will add tools to your arsenal to tackle cash flow.
Popular examples of cash flow solutions include:
- Trade finance – helping to close the funding gap between importer and exporter
- Invoice finance – releasing capital tied up into unpaid invoices
- Stock finance – unleashing cash from stock in your warehouse
- Leasing – helping you to secure the equipment you need to operate without upfront investment
- Sale and leaseback – giving you a lump sum for your owned equipment while still allowing you to retain use
While each of these solutions will work best for specific issues and business types, each has the effect of releasing cash to get your operations moving again and allowing you to keep up with your financial commitments. They are also all relatively short-term.
However, it’s essential to research any external funding carefully before you commit and be confident that you can meet the required repayments. This will prevent further harm to your business.
Conclusion
Understanding the importance of good cash flow is essential if you want your business to survive and thrive.
If you want to reap the benefits of good cash flow, you also need to take the time to manage it. By ensuring accurate accounting across your business, effective invoicing and credit management protocol when required, you can limit many of the issues that harm cash flow and protect your finances.
If you still face cash flow problems, understanding the external support you can utilise may be a lifeline for your business.
The Pegasus Funding team can share various solutions that will enable you to manage cash flow in your business, including the likes of trade, invoice and stock finance. We can also put you in touch with the appropriate sources to access the support you need.