Cash Flow

Revenue is vanity, profit is sanity, but cash is king – it is an old saying, but one that I believe to be true, as cash flow issues are one of the main reasons small businesses fail. A healthy cash flow is crucial to the success of any business, as without it, wages cannot be paid, contracts won’t be delivered, stock can’t be purchased, and invoices can’t be settled.  

In this article, I will outline why cash flow management is so important and provide my tips for managing your cash flow.  

Cash flow forecasting – what is it and why bother?

Cash flow forecasting is a regular process where you review what cash will be coming in, such as customer orders, tax rebates, and grants, and what cash will be going out, such as wages, overheads, and materials, over a specific period of time. Most businesses will experience positive and negative cash flow situations, but how you manage these scenarios is important for the long-term health of the business. Good cash flow forecasting helps you anticipate what is coming, which allows you to prepare for any cash shortfalls and avoid the worst-case scenario of running out of cash. By being prepared for any cash shortfalls, you can avoid having to pay to plug any gaps, whether that is interest repayments, overdraft fees, or discounts.  

Do you have problems with your cash flow? 

If any of these warning signs sound familiar, it may be that your business is at risk of cash flow problems –  

• Unpaid invoices from customers are piling up

• A period of sales downturn resulting in losses

• Increased reliance on credit cards and overdrafts for daily expenses  

• Using personal finances to cover business costs  

• Struggling to pay invoices or staff on time

  
  

Top tips for cash flow forecasting 

• Be consistent. There is no point spending time one month and then ignoring it for the next few months. For smaller businesses, I’d recommend forecasting once a week – block out the time in the diary and make it a non-negotiable commitment. If you don’t have the time to do it, make sure it is outsourced to someone with the experience and skills needed to monitor it.  

• Be realistic – don’t overestimate the amount of cash you expect to receive or how soon you will receive it - until cash is banked, it’s not real. Make sure you forecast conservatively.

• Aim to give yourself a cash reserve to cover unexpected costs and allow for opportunities. A cash reserve will help you grow the business in the long run, even if it means paying yourself less in the short term.

• Ask yourself challenging questions – what would you do if you lost a big contract? How long would it take to win new business? Do you need to secure finance now to cover yourself? Having answers to these questions puts you in a stronger position should the worst case happen.  

• Ensure to update your assumptions and models as you gain experience and knowledge.  

• Use technology to help you –replacing your spreadsheets with software will speed up the process, be more efficient, and reduce manual errors. There are many available apps that connect with accounting software to help automate some of the forecasting process.  

• While none of us have a crystal ball, try to anticipate what might be coming so that you’re prepared for any peaks and troughs. Consider competitor action, economic conditions, your pricing, and your previous sales history. Plan for how you will deal with the harder months.  

• Invoice clients as early as possible and send invoices by email so that you have a record. Alternatively, use your accounting package to send the emails for you. We use Xero, which emails invoices directly to customers and can also email statements.  

• Speed up the payment process:  

  -  Set clear payment terms on all invoices.  

  -  Use automated software to send reminders and track payments. If you are using software like Xero, there are integrated invoice reminders that can be turned on. Alternatively, there are many apps available to integrate with accounting software.

  -  Make payments easy by offering multiple payment options (credit cards, online transfers, direct debit, etc.) and avoid cheques where possible.  

  
  

Potential problems to watch out for with your cash flow

• Late payments – this is one of the most common problems with cash flow.  If you don’t have a streamlined process in place for billing your clients and processes in place for chasing up late payments, then your cash flow will suffer. Take advantage of readily available technology to automate invoicing and chasing outstanding payments.  

• Overtrading – this is where you have an increase in orders, which is excellent news, except that payment for these orders is received well after the costs to fulfil the orders have been incurred. If you know this is a possible issue, it may be possible to obtain finance to help. Depending upon your industry, invoice discounting services can help unlock cash from sales invoices before they are paid by customers.

• What payment terms do you offer your clients? The more generous the terms, the more problems this could create with your own cash flow.  

  
  

Seasonal fluctuations 

Seasonal fluctuations can also cause havoc with your cash flow, but there are ways to manage this -

• Take a look at your historical data and sales to gather insight. If you’re a new business, think about what you know about your potential customers and market.

• Ensure you have a thorough understanding of all your fixed costs that need paying every month, regardless of sales.

• Consider amending the amount of stock you order, but be sure to give your suppliers plenty of notice.  

• Try to build up cash reserves during the busy months so you can dip into them during the quieter periods.  

• Use the quieter periods wisely – work on your marketing, encourage customers to order early, complete training, etc.  

• One way to mitigate seasonal fluctuations is by introducing complementary products or services that balance demand. For example, Fat Face initially focused on making jumpers for the ski season but later expanded into surfwear, creating a more consistent, year-round revenue stream. Or can you change the marketing message around a product, for example, a leather wallet that makes a great gift for Groomsmen during the wedding season, could be the perfect stocking filler in December.

  
  

What to do if you come into trouble 

• If you do come into short-term trouble, then make sure you know what your options are for short-term finance, for example, a bank loan, invoice factoring, VAT loans, or director’s loans.  

• Check your supplier’s terms and delay payments as long as possible (without breaking your agreement, incurring late fees, or damaging your relationship). If you have a strong relationship with your suppliers, ask for an extension on the payment of invoices. It is always better to talk to suppliers rather than just not paying.  

• Look at ways to save on purchasing costs from your suppliers and negotiate on every purchase you make. Ideally, seek to negotiate across your full supply chain with all your suppliers.  

• Regularly assess where you can cut costs, without compromising your product or service. These could be areas such as reviewing and adjusting product components and reviewing staffing requirements (though please seek HR advice first). Carry out a thorough review of your overheads - do you need all the office space, or are you able to sublet the space? Can you reduce travel? Are there subscriptions you are no longer using? Is any insurance no longer required? Can you renegotiate or refinance outstanding loans?  

• Consider selling surplus stocks at a discount. Review all your assets and look to sell those that are no longer required or can be leased. By leasing vehicles, computers, and machinery, you can access the latest models without tying up cash, and you can expense the lease cost on your business taxes. If the only option is fixed assets, talk with finance providers about asset finance options.

• Offer a discount for early payment of any outstanding invoices or run a sales promotion to encourage sales. Make sure that the benefit of being paid early is worth the cost of lower revenue in the long run. Please note, the VAT treatment on prompt payment discounts does need to be considered (please visit https://tinyurl.com/5h4x24vs for more information – whilst this article is specific to Sage, it provides a good overview).

Finally, don’t be afraid to ask for help – you are a business owner, not an accountant, so speak to your accountant or get in touch for help. As a part-time finance director, I can help with cash flow forecasting and management, advise on your finance options, and provide peace of mind.