Cash flow problems can cripple a small business, and the thrill of sales can lead to poorly managed cash flow. Late payments and missed invoices are all too common for small businesses and cause major problems.
Finance experts from FSB Funding Platform explain how you can implement effective cash flow management and grow your business with the right funding.
1. Be proactive
Start by looking at your current method for managing the money coming in or going out of your business, such as payroll, bills, purchases and investments. A reactive cash flow plan is common in many businesses, but as the past year has shown, there is always something you fail to expect.
A proactive attitude will ensure you know what is on the horizon in the months to come, enabling you to plan financial requirements efficiently and have your funds lined up. This puts you in a stronger position to get funding on your own terms, and can minimise the chance of financial emergencies. Of course, you can’t plan for everything, but this will give you a realistic indication of your financial health.
The same is true for the money coming into your business. Issue your sales invoices in a timely manner. If you are late to issue invoices, you can’t blame clients for paying late. Use automated payment methods with your clients to make getting paid easy, so you can spend less time chasing invoices and more time running your business.
- Do you have a system for tracking payments?
- Have you agreed on clear payment terms when signing new clients and contracts?
- Are the terms in your billing process too lenient?
- Do you have a process in place for chasing late payments?
2. Update your cash flow forecast
An up-to-date cash-flow forecast is essential, particularly in a growing business. Make sure you understand the amount of cash and working capital required to operate the business. The financial situation of your business is always changing. It might be that your forecast has changed dramatically due to losing a major client. There is no need to go overboard on the detail, but make sure you cover the key aspects of your business.
Stocking up ahead of a busy trading period? Review your stock and work-in-progress levels. How much capital do you have invested in inventory?
Engaging with new suppliers, or have contract renewals on the horizon? Review your contractual agreements such as costs and payment terms, and factor these into your forecast so you don’t have any unexpected outgoings. Don’t forget to issue sales invoices in a timely manner.
Made changes to your business model? Check in with the figures and see how this impacts your numbers. For example, you might have increased staffing costs if you’ve expanded your online distribution or you’re offering new services.
You should update your plan and forecast regularly – ideally quarterly. Check in frequently to review and evaluate your progress against the plan.
Did you know? FSB members can access a free cash flow forecast through FSB Funding Platform’s links with Open Banking when applying for finance, based on actual data delivery.
3. Reassess, review and be realistic
Take an honest look at your business. Regularly checking under the bonnet to see how the numbers behind your business look is a good habit for any small business owner, especially ahead of busier trading periods like the summer season or other holidays.
Whether it’s discussing terms with clients and suppliers, assessing your workforce or reviewing your costs, you can stay alert by being aware of what’s coming in and going out of your business.
As your business grows, you may start to face a new set of challenges, such as investing in more raw materials and stock, moving to a larger premises or hiring extra staff. At this point, you may need to weigh up your funding choices to grow your business further.
4. Be flexible
A solid financial plan can ensure your business stays as flexible as possible. You’ll be well-prepared to capitalise on growth opportunities or cope with unexpected shifts in the market.
Flexibility gives you a competitive advantage. For example, it may allow you to bring in additional inventory, update equipment or extend payment terms without damaging your financial health.
It’s always a good idea to have some cash in reserves. If things are going well, it might not seem necessary now, but some cash tucked away for a rainy day is always useful. Try the simple 1/3 rule: one-third for taxes, one-third for dividends, and one-third left in the business.
5. Consider cash flow finance
Cash flow finance can reduce your upfront capital expenditure so you can better balance your books and avoid being left short. From taking advantage of new opportunities and investing in new products or services, to bridging short-term funding gaps, cash flow finance is a great option for increased flexibility.
Before looking for external capital, you should make sure you’re managing cash effectively with our tips above. Being able to demonstrate good cash management sends out the right signals to potential investors or lenders. Here are two common examples of cash flow finance and how they can help your business.
Trade finance is a common external source of cash flow finance for businesses that import or export, but you don’t have to be selling globally to benefit from this short-term credit. “Trade finance isn’t purely for import and export,” says Adrian Innes, trade finance expert at FSB Funding Platform. “It’s for anybody who trades and experiences a delay between selling your goods and receiving the cash for those goods. The key thing is to understand the reason why you need the money.”
Invoice finance lets you take control of your cash flow quickly and easily. You typically receive up to 85% of the value of an invoice immediately, which can help to ease cash flow worries. The funder will collect the money owed from your invoices, and pay you the balance, less any fees.