Cash flow is a perennial problem for growing businesses, and the larger your business, the more that seems to be the case.
According to a SME Finance Monitor, 92 per cent of businesses with 50-249 employees that raised funding in the last quarter of 2021 did so for a cash flow related reason.
And that’s not surprising. If there’s more cash leaving your business than entering it, you might struggle to pay suppliers, bills and employees, and ultimately risk becoming insolvent.
But plugging the gap with finance isn’t the only, or even best, solution for cash flow issues. You should also be looking at preventative measures like effective cash flow management.
Here are our top tips for managing cash flow more effectively.
Update your cash flow forecast
In a growing business, your finances are constantly in flux. That’s why it’s vital to maintain an up-to-date cash flow forecast, which should give you a detailed picture of incomings and outgoings and help you understand whether you have enough working capital to meet your short-term obligations.
It’s simple. All you need to do is:
- Choose a period of time to cover – from a few weeks to a few months, the more data you have to go on and the shorter the timescale, the more accurate it will be
- List your incomings – start with sales, and include everything from tax refunds to investment and grants
- List your outgoings – rent, salaries, stock, tax, bank charges and marketing spend
- Work out your running cash flow – minus your net outgoings from your net income, which will show you whether you’re spending more than you’re taking (negative cash flow) or taking more than your spending (positive cash flow)
- Update it regularly – maintaining an accurate cash flow forecast will help you plan for the future and identify problems before they happen
Reevaluate and renegotiate
Now that, thanks to your forecast, you have a good overview of your cash flow situation, you can spot opportunities to improve it.
Don’t be afraid to open a dialogue with your clients and see if you can renegotiate payment terms, especially if you’ve been too lenient in the past. And remember, if a business doesn’t pay you on time, you have the right to charge statutory interest of 8 per cent plus the Bank of England base rate.
Likewise, if you know you’re going to struggle to meet your upcoming payments, you can arrange more manageable terms from a supplier. The important thing is to get ahead of the situation rather than letting it get out of hand and souring professional relationships.
Your cash flow forecast will again prove useful in identifying any areas of your business where you could make cost savings. Cost cutting doesn’t have to mean impossible decisions and sweeping changes to your strategy – it could be as simple as switching to a cheaper supplier, reducing marketing spend, or delaying plans until you’re more liquid.
Have a regular health check of your business spending and assess what’s effective and necessary.
Monitor energy usage
Keeping track of how, why, and when your business is using energy allows you to cut down on unnecessary consumption and to incorporate your energy bills into your cash flow forecast.
The easiest way to monitor energy usage is by getting a smart meter installed. Smart meters automatically send accurate gas and electricity readings to your energy supplier over a smart data network. If you receive an in-home display, you’ll be able to see in near real time how much energy you’re using and how much it’s costing you.
Everything you need to know about smart meters for your business – A smart meter is greener and may save your business time and money – here’s how to get one
Late payment is one of the major causes of cash flow issues for businesses. Fighting this late payment culture can be like banging your head against a brick wall, but finance can give you the flexibility to keep investing and growing while you wait.
Using invoice finance, you can unlock between 85 per cent and 95 per cent of an unpaid invoice as soon as it’s raised. Once settled, you receive the balance minus a small fee. You can choose either invoice discounting, which remains confidential as you retain control of collecting the payment, or invoice factoring, where the provider will collect the outstanding payment for you.
Or if you’re an importer or exporter, you could take advantage of trade finance, which helps to reduce the risks of international trade. Trade finance is an umbrella term for a variety of financial instruments, but essentially, once a purchase order is confirmed, exporters can get an advance on payment and importers can be extended credit to fulfil the order.
Remember that your ability to secure these types of finance is contingent on you having healthy cash management to begin with. Get that right and use finance to give you flexibility.
This article is part of a paid-for information campaign for Smart Energy GB.
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21 tips for cash flow management – There are two fundamental goals at the heart of improving your cash flow: control your expenditure and regulate your income. To that end, there’s a raft of clever tactics that can enable you to explore expansion opportunities and reduce the chance of being caught short if the unexpected happens