Small business in focus: How to improve your cash flow

Getting to grips with your cash flow is an integral part of running a successful small business. But even best-laid plans can sometimes come unravelled. There are so many factors that can have a negative impact on your cash flow, such as late payments, unexpected expenses or even the weather! We have extensive experience in supporting small businesses find business loans to fill in the financial gaps when they appear, so we are well-versed in all things cash flow and we’d like to share some of our top tips with you to help you improve your small business cash flow.

Let’s start with the basics. Cash flow is simply the term used to describe the amount of money flowing into and out of your business. Effective cash flow management will make sure that the amount flowing out is not consistently more than the amount flowing in and that there is cash available to pay creditors when necessary.

If you are looking for funding for your business, either from investors or from lenders, you need to show that you have a handle on your cash flow. Being able to demonstrate responsible handling of cash flow to potential investors or lenders is a vital part of seeking funding for your business, which, in turn, will make or break your business when it comes to growth and expansions.

You really shouldn’t be considering growing your business until you have a positive cash flow situation established. Your business’s financial accounts will include the following documents, which will show the status of your cash flow.

Your cash flow statement

This document details the flow of money in and out of your business, allocating all activities to one of three categories: your operating activities, your investing activities and your financing activities. Any problems with your cash flow will be evident on this document and working to improve this statement and the position of your cash flow will pay dividends when it comes to attracting investors or securing funding in the form of a business loan.

Cash flow forecast

This is also part of your company accounts and should show your projected cash flow both into and out of your business, based on what you know or can predict about your income and costs. Everyone running a business should know how to produce a cash flow forecast or work with an accountant who can help.

The first stage when looking to improve your cash flow is to identify where the problems are. For some, this will lie in late payment of invoices, or poor organisation and timely issuing of invoices, for example. For others, it could be crippling expenses or overspending in certain areas.

Analysing your cash flow

Take a look at your cash flow statement and analyse where the problem areas are. The amount of cash you have available at any given time is your liquidity. A good level of liquidity is a positive thing. You may notice, from your cash flow statement, that you are experiencing lower liquidity due to recent investment activity, which is a cash flow issue that should sort itself out in time.

Or you may realise that your liquidity was given a boost earlier in the year due to financial activity. You may have accumulated expenses over this period, but your cash flow situation has since suffered as your income through operating activity is too low.

Take steps to reduce late payments

A study by the Department for Business Energy and Industry found that almost a quarter of businesses in the UK said that the late payment of invoices threatened their survival.

Every business owner has been there. You send an invoice off to a client that you know is unreliable when it comes to payment, but you still work for them and you continue to send invoices off, and you just KNOW it’s going to be a headache to actually get paid. The money owed to your business but not yet received is called outstanding receivables and you need to keep on top of this

If you’re serious about improving cash flow, it’s important to realise that you have the solutions in your hands. You can’t always blame your clients for late payments. There are things you can do to make sure it doesn’t happen.

• Automate the sending of payment reminder emails

• Make sure your payment terms are clearly stated on your invoices

• Don’t work for clients who don’t pay - and state this in your terms

• Reduce your expected maximum payment term on your invoices

• Credit check your clients/customers

• Switch to advance payment

Managing business cash flow isn’t all that different from managing your personal finances. Most of us know that if there’s more going out than coming in, we need to either increase the amount coming in or cut costs. Budgeting is something many of us adopt in our personal lives, but why not apply it to your business as well?

Take a look at your expenses and consider which ones are non-essential and could be scrapped. When the going is good, it’s really easy to start adding expenses that you then need to streamline further down the line when they start to add up to an unaffordable amount.

• Subscriptions/publications

• Production levels

• Utility bills

• Software licenses

• Workplace socials

• In-office freebies

• Marketing and advertising

• Trade shows

• Rent

• Freelancers

Invoice financing can help bridge the gap between issuing an invoice and receiving the cash owed to your business. If late payment of invoices is a continuing and unavoidable problem for your cash flow, invoice financing could help you.

Before considering paying a fee to an invoice financier, however, consider the following:

• Will your cash flow be positive once you receive the value of your outstanding invoices?

• Can you afford the fees?

• Do you mind your customers knowing you are using invoice financing?

Have you looked into all alternative funding options for your business? Is this the best one?

We know that one of the main reasons our customers come to us is to help improve cash flow. There’s no denying that business loans, especially ones tailored to your needs and with flexible and affordable repayment terms, can help you to fill the gaps in your cash flow.

Some cash flow problems are endemic in a business, such as those that are highly seasonal, for example. It is possible to even out cash flow in these businesses, but it may take several years of predictable trading to achieve this. In the meantime, providing your company accounts look solid, you may be able to get a business loan that allows you to get on with operating, growing and investing in your business.