Strong cash flow is important for any business, but for SMEs it’s the lifeblood of their operations. Cash flow is all about the amount of money coming in and out of your business, and for small business owners, a positive cash flow provides opportunities to invest and grow.
Research conducted by accountancy firm Xero found that around 50,000 small businesses fail each year due to cash flow issues, and 65 per cent of these point the finger at access to funding as the main issue they faced.
Cash flow problems can be caused by many different things, from late payments to reduced profits and potentially making other investments that could help growth. It’s something that business owners have to carefully manage. Now more than ever, it’s crucial for businesses to maintain a good cash flow position with the old adage that ‘cash is king’ never being more relevant.
To help, we’ve put together five simple steps to good cash flow management that can help your business be stronger and more resilient in challenging times.
Prepare a cash flow forecast
Cash flow planning is an important way of making sure you can stay on top of your cash flow and allows you to prepare for potential issues ahead of time. Accurate cash flow projections will also help you grow your business. Whether you’re thinking about expanding into new markets, investing in new technology or simply want to take on more staff – cash flow planning can help you decide if it’s affordable.
Set clear, watertight payment terms
This can sometimes be easier said than done, especially with many large businesses having fixed procedures in place for the time it takes in paying invoices. However, by setting your payment terms upfront, you have the opportunity to compromise rather than having no control and will therefore have a clear understanding before entering into any agreements. The key thing is clarity, so take the time to plan and set your payment terms in a way that works for you and your particular sector.
Stay on top of invoicing and make payments easy
When you choose to invoice for work, it’s one of the few factors that you can control when it comes to cash flow management. Make sure you have a process in place in order to send your invoices out as soon as possible, and then your income will likely come in more quickly.
It’s also worth considering how easy it is for invoices to be paid, the simpler the process, the more likely a client is to complete it quickly and therefore you’ll avoid unexpected delays that could impact your cash flow.
Monitor your cash flow regularly
Whilst preparing a cash flow forecast will go some way towards helping you understand your businesses’ financial situation, regularly monitoring your cash flow will give you the best indication.
This also means keeping your books up to date and ensuring the accounting information is accurate. A good general rule of thumb is to try and ensure you have enough money in the bank to manage all expenditure for three months, but of course this does depend a lot on the sector you operate in. The key thing is to spend time understanding both your income and expenditure to ensure the cash flow figures are at a level you are comfortable with.
Extend your credit line
Securing finance, such as a business loan, can help a small business to survive a period of negative cash flow. However, it is best to consider financing alongside cost-cutting measures to ensure you make the most profitable use of the extra cash and don’t borrow unnecessarily. If your credit line is already extended beyond comfort, you could consider additional shareholder or third-party investment as an alternative means of raising extra cash.