Debbie Austin FCCA discusses the management and importance of cash flow and how to make improvements.
Understanding the basics of cash flow management is an essential part of running a business successfully.
SME Loans stated in 2019 that 78% of UK SMEs were forced to wait at least one month beyond their agreement terms before they were paid money they were owed.
Another survey completed in 2018 by the Department for Business, Energy and Industrial Strategy found that 24% of UK businesses report late payments as a threat to their survival. Overdue invoices impact on your ability to pay employees, repay debts and maintain product and service levels.
At its worst it could leave you with not much of a business to grow, or even no business at all. So this leads to the question, how to improve cash flow?
What is cash flow management?
Cash flow management is the process of monitoring how much money is moving into and out of a business. This involves analysis and implementing initiatives to:
Help inform strategic decision making
Problem solve with the finances in mind
Plan and budget for future projects
Ways to improve cash flow with credit control
Implement customer credit checks
Provide clear terms and conditions in writing
Send invoices out when work is completed
Offer electronic payment options to receive money owed quicker
Implement debt payment policies and establish late payment fees
Follow-up on outstanding invoices regularly
Why is cash flow so important?
Managing cash flow effectively is what keeps small and medium sized businesses afloat.
If you have more money leaving the business than coming in this is called a negative cash flow. This isn’t good if it continues for a prolonged period of time. In essence your business is consuming more money that it makes. This means you'll start to eat into any reserves you may have. Eventually this can lead to closure.
On the other hand, positive cash flow is where more money is coming in than going out. You’ll have the financial means to keep your organisation running. You’ll be able to cover monthly expenses such as rent, taxes, and other accounts payable. A healthy cash flow may even enable you, in time, to invest in the business to fund expansion.
Start-up businesses that are in the beginning stages of the business life cycle will also likely be seeking funding. Early implementation of cash flow management policies can make the difference between a successful or failed fund raising. Having a firm handle of your cash position will demonstrate to investors a clear sense of financial acumen and fiscal discipline.
If you're looking to expand then maintaining a positive cash flow is essential. Transitioning from the start-up stage to scale-up will require you to have plenty of funds to hand in order to make the necessary investment in people, offices, systems and controls, IT, and software that come with growth.
Think about planning for the future!
Cash flow management in evidence in your business
1. Company accounts
The cash flow statement is an important document that explains the cash movement in and out of your business over the financial year and is included in your company accounts.
The cash flow statement breaks cash up into three categories:
Operating activities – how much cash comes from the sale of goods and services, less the amount needed to make and sell the product/services
Investing activities – how much cash has been spent on capital expenditure, such as new equipment
Financing activities – how much cash has been spent on outside financing activities, such as cash raised through selling stock
2. Forecasting and projections
Cash flow forecasting and profit projections are integral to providing critical information to owners and investors. This allows them to understand what should be focused on and implemented based on the resources available.
Start-ups will find forecasting and projections helpful for obtaining funding, and more established businesses can use it to help secure further investment for growth.
3. Expense management
Money coming into your business means you’ll have the means to keep up with business expenses. It’s important that you manage your cash flow correctly to ensure you have enough funds to cover outgoing payments.
You can improve cash flow with these additional top tips:
Potentially increase product and/or service pricing if it's commercially viable
Establish a good working relationship with suppliers; this could potentially lead to priority turn around times or discounts
If your business is seasonal, consider diversifying your products or services to help generate income during slower months
Invest in your business with things like customer service training for employees, refurbishments, and new technology to help keep current customers happy and repeat purchasing
Make sure invoices are accurate before sending out to avoid the delays in payment caused by customer queries and re-issuing with corrections
Keep invoice communications simple and easy to pay so as to prevent queries
Consider offering discounts for early payments by customers
Look at the option of charging a deposit up front prior to the delivery of goods or services as a means of obtaining cash up front and potentially a form of insurance
There’s not a simple "one-time" fix when it comes to improving business cash flow. Credit control is a key way to help understand who owes you money and getting paid. Controlling the credit that you extend to your customers and clients is vitally important and this should be a priority when working on making improvements.
Finally, remember that early signs of cash flow issues should be taken note of and addressed immediately. Avoid this by working with your accountant to establish an effective credit control system.
This post was created on 12/10/2020.
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