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How to sort your business cash flow and sleep better


Coins and pens

Research published by the BACS Payment Scheme found that 6 out of 10 small business owners are losing sleep over cash flow headaches. The latest research from FSB shows the vast majority (84%) of small firms report being paid late, with a third (33%) saying at least one in four payments they’re owed arrives later than agreed.

You may have heard the phrase "sales are vanity, profit is sanity” before. Perhaps it’s time to now add "cash flow is reality”. But how can you make sure that your business has the strongest possible cash flow?  Use our handy checklist of ideas to help optimise your cash flow position.

Clear contract terms

Make sure when you win a new customer that your contract and payment terms are clearly laid out. By setting expectations right at the start of a relationship about when you expect to get paid, you are often able to avoid unnecessary conflict later on.

Invoice on time

Whilst this may seem really simple, you should make sure you invoice on time. Be honest with yourself and reflect on how often invoices have been issued late and has this has snowballed into a situation that was then difficult to resolve?   

Track payments

Have a system to track payment of your invoices and don’t wait until the end of the month to see what invoices have been paid. By then it is too late. There are a number of affordable online software accounting packages out there, that you can use to do this.

An online system will also allow you to create invoices quickly and efficiently using a branded template and issue account statements to follow up late payers with professional looking statements.  By directly linking an online accounting software to your bank account you can quickly and easily reconcile payments and expenses with invoices.

If you don’t want to use accounting software, then you can still track payments by watching the cash in your bank account, or set up an alert in your bank account to let you know when an important payment comes in. A number of banks now offer this option online or as part of their mobile banking app.

Credit limits

Do you know the financial strength of your customers? What sort of checks do you make before extending credit terms and how do you decide on a credit limit?

Whilst we all want to do as much business as possible, bad debts can quickly set a business back and put it under pressure.

There are online services that you can use that will allow you to view commercial credit reports on potential customers that will help you assess the credit and cash flow risk to your business and suggest a credit limit. Some are free to use and others offer ongoing access on a subscription basis.

Cash flow forecasting

The excel spreadsheet has been the friend of many small business over the years, and properly set up can provide you with useful insights on future cash. In recent years subscription based cash flow forecasting software tools have become available which offer the ability to predict and enhance the cash position in your business.

If this seems a little ‘over the top’ for your business, then you may be missing a trick: tracking how much cash is tied up in various areas of your business can be a real eye-opener. Because it will not only show you when you might encounter a squeeze, but it may also allow you to negotiate more effectively with key suppliers and key customers. For example, you could offer a small discount for a large contract to be paid within 7 days, although you would ordinarily invoice on 30 day terms.

Give yourself a cash buffer

If you are making good profits, it’s an ideal time to consider leaving some cash in the business for a rainy day. Be conservative and apply the simple 1/3 rule.  One third for taxes, one third for dividends and one third left in the business.

Without a cash buffer you may need to consider finance if you see a bump in the road head. The more breathing space you can give yourself, the more likely you will be to fix the problem. Equally, the cash you save could be invested in business savings accounts or the like, so that the cash you hold as a reserve is not devalued over time by inflation. 

Growing fast can impact your cash flow

If you are expanding quickly you may be spending money more quickly that you can recover it from your debtors. This is known as over trading and if you are not proactively managing your cash flow then you could in some circumstances simply run out of cash.

As always careful planning and a cash flow forecast will help you understand the future requirements of your business and whether you need to consider external finance to fund your growth.

Depending on your business model, you could also consider staged payment schedules to even out some of the bumps while you are going through a fast growth period.

Using external finance to improve your cash flow

Implementing a range of measures to optimise your cash flow position is definitely a great move. However, there will still be circumstances where you may need to look at external finance to help you manage and improve your cash flow.

Contrary to what some believe, this is not a sign of bad business practices, it is just a question of how well you are equipped to deal with certain aspects of the financial management of your business.

There are a number of debt finance products that can help including:

Cash Flow Finance

There a number of ways to use financial products to help improve your cash flow.

A working capital loan, typically a business term loan, can give your business the flexibility it needs, freeing up cash to grow your business, take advantage of new opportunities and invest in new products or services. It can also help you meet short term funding gaps, for example, bridging the gap between customer orders and supplier payments. 

You can find out more information here:

Invoice finance is another option to improve cash flow without needing to wait 30, 60 or 90 days for your invoices to get paid; you get a high percentage of the invoice value advanced the moment you raise an invoice. However, you need to be aware that some invoice providers might prefer you entering into a 12 or 24 months contract which would require you to sell your debtor book for the agreed time period. If that is something you are happy to consider, then make sure you are getting additional support from the provider. For example they may provide some of the reporting you need in order to track invoice payments. Or you can outsource this further through a factoring arrangement, meaning you won’t need a staff member to deal with day-to-day work.

Monitoring your cash flow is an important barometer of the health of your business. It’s crucial to understand your future cash flow requirements and how to take action. More than a third of SMEs cite issues with cash flow as a barrier to growth.

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