According to research, 57% of UK small business owners have had problems with cash flow. That can be a worrying place for a business owner to be, but as we will explore in this article, it’s often preventable.
The report also found that 1 in 7 small business owners were left unable to pay employee wages due to cash flow issues, equating to a total of 2.2 million individuals not receiving their pay on time. Meanwhile, 38% said they were unable to pay their debts.
On average, SMEs miss out on £26,000 of work due to cash flow restrictions.
A key driver of these cash flow issues is that SMEs struggle to get paid for their work, which causes a liquidity strain. On average, SMEs miss out on £26,000 of work due to cash flow restrictions.
Clearly, poor cash flow poses a significant challenge to small businesses and, as we cover in our article on how to deal with late and missing invoice payments, such issues can ultimately lead to insolvency. Therefore, it’s essential to know how to manage cash flow in your business.
How to manage cash flow in your business
Let’s take a look at five cash flow management tips that will help you stay on top of changes and fluctuations in your business and keep the cash flowing in.
1. Cash flow forecasting
You’ve probably heard the term before, but exactly what is a cash flow forecast?
A cash flow forecast uses business information like payables, receivables, trends and hiring plans to extrapolate what your cash flow will be like in the future. It’s basically about understanding how cash will flow in and out of your business over the next 6, 12, 24 or 36 months, so nasty surprises are a lot less likely.
There are a few different cash flow forecasting tools out there, including Futrli, Float, Fluidly, Cash Analytics, and Anaplan. Some will even integrate with your accounting software – forecasting has never been so easy!
How to create a cash flow forecast
- Choose a time period. 6 months is a good place to start, but you might want to plan for a longer period if you need to look further into the future.
- Map out how much you expect to make from sales during that period. Try breaking it down by month so you can see the numbers in more detail.
- Include recurring expenses, future hires and expected investments. This keeps a buffer for unforeseen expenses (there will always be some!)
- Look at previous years’ figures. This will show seasonal fluctuations so you can be more accurate. If you expect to make more or less than last year, make sure you include that. Remember, a cash flow forecast is only useful if it’s realistic.
- Factor in any new products or services you’re launching. This could mean more profit, or it could mean you don’t recoup costs for another 6 or 12 months. Whatever it is, put it in your forecast.
- Prepare best-case, worst-case, and most-likely scenarios. There are always lots of factors to consider – market changes, customer habits, seasonal differences. To be extra prepared, create cash flow projections for a bad, stable, and brilliant next 12 months.
2. Automate your invoice chasing
Chasing late paying clients is inevitable (after all, roughly one in two invoices is paid after the due date), but you are in control of how you do it.
Strict credit control and automatic invoice reminders are vital. You won’t have to send manual emails to your clients’ accounts departments, or keep checking your own company account to make sure payments have come in.
An incredible 57% of business owners have been forced to ditch holiday plans in favour of chasing late payments, so if you want to hold onto your down time, get some software that chases invoices for you. Some of the best solutions include Chaser, Upflow or Esker – these will help automate your dunning sequences while protecting your commercial relationships.
4. Track your expenses meticulously
It’s easy for business costs to get out of control, so if you’re not the type to check the company account balance every day, it might be time to start. First, assess your business’s current fixed and variable costs.
Fixed costs are the expenses which a company must pay out each month. They are independent of other business activities and do not change with production levels or sales. They include:
- Full-time staff salaries
- Rental lease or mortgage payments
- Office supplies
- Equipment and maintenance
- Subscriptions to services/software
- Depreciation of assets
- Marketing and advertising costs
On the other hand, variable costs are those expenses which fluctuate in accordance with the amount a company produces or sells. They include:
- Direct labour costs
- Sales commissions
- Marketing campaigns and promotions
- Operational costs
- Raw materials
- Vendors and contracts
- Part-time employee salaries and contractors
Although some of these payments are already committed, others may have potential to be reduced. The member of your team responsible for monitoring accounts should sit down and go through all expenses in detail, before making recommendations for areas to cut back on. It’s not the most exciting task but it’s really useful when it comes to improving cash flow. You’ll see your expenses drop next month, and you’ll make a significant saving over the year.
4. Hire a bookkeeper and/or accountant
Sometimes you need an expert to take a look at things for you. Business owners have to distance themselves from day-to-day admin as their business gets bigger, but it’s essential to retain an overview of the finances. A trusted bookkeeper or accountant can be the person who takes care of all the details while providing you with the big picture.
What’s the difference between a bookkeeper and an accountant?
A bookkeeper keeps an accurate and complete record of the financial transactions of a business. They will take care of the manual accounting processes, like recording figures and monitoring cash flow.
An accountant will focus on the bigger financial picture and use your financial data to help and advise you, making sure you meet your legal responsibilities. They can also make predictions and recommendations, so you’ll know how to move forward and when to spend or cut back.
Depending on your business situation and current employees, you might need one more than the other. Or you might even need an in-house finance leader if your operations are expanding. Either way, the sooner you hire, the sooner you can feel more confident about cash flow.
5. Boost cash flow with a smart payment solution
Small business owners can often feel helpless when clients don’t pay up. Over a quarter of SMEs dealing with late payments have paid their own suppliers late, and 28% of business owners have even cut their own salary to offset restricted cash flow.
It doesn’t have to be this way. Sometimes, all it takes to ensure timely payments – and therefore improved cash flow – is providing your customers with payment options that are convenient and simple.
Take Hokodo’s Buy Now, Pay Later solution for B2B e-commerce, for example. We help you to offer trade credit to business buyers without any of the cash flow related drawbacks. How? It’s simple. Your customers shop as normal and then choose to pay in 30, 60 or 90 days with Hokodo. Once the order has been shipped, we pay you upfront, thereby drastically reducing the time your business spends waiting for payment. Cash flow improves for you and your customers, so all parties can buy, sell and do more.
If you would like to find out more about how Hokodo’s B2B Buy Now, Pay Later solution can help to keep your cash flow healthy, book a demo today.