Regardless of the strength of your business proposition, strong cash flow management is the cornerstone of a successful business.
It’s not uncommon for businesses to be sales and profit focused, with little emphasis on cash and working capital. Profit does not necessarily equal cash.
Covid-19, Brexit, the Suez Canal blockage. These are all challenges which are likely to impact a business’s cash flow.
For example, 62% of all small companies have experienced either an increase in late payments and/or had payments frozen completely in the wake of Covid-19, according to FSB’s latest report. And in a survey conducted by the British Business Bank, 78% of SMEs said cash flow support was the reason for requiring funding in 2020, up from 49% in 2019.
Good cash management has never been more important. Low order volume, high value business models will be more vulnerable. As will industries where payment terms are frequently flouted and supply chains are long and/or overseas.
The fundamentals are basic: cash needs to flow in faster than it flows out.
Here are some tips on how you could insulate your business in these challenging times:
1. Improve visibility
With Brexit and Covid-19 bringing unprecedented challenges, the trading landscape for so many is changing. Regular weekly cash flow forecasting with accurate trading assumptions to reflect these changes is of utmost importance. Cash flow shortfalls are better identified in advance. This gives you time to consider your options and engage early with customers, suppliers, and external funders.
2. Monitor cash flow regularly
There is a great selection of online cloud accounting software available, such as Sage, QuickBooks, Xero, and FreeAgent. These tools make it easier to regularly upload and receive up-to-date information.
3. Instil robust credit control
No business will choose to turn away trade, but a robust credit checking procedure should be followed before offering clients credit terms. A disciplined collection process will limit slow payers.
4. Review payment terms with longstanding suppliers
Are you paying suppliers too soon? Is there opportunity to negotiate extended payment terms? It’s always worth opening up discussion. If you are struggling to make payments to HMRC, contact them on 0300 200 3835 to discuss your payment options.
5. Identify opportunities or hidden threats
Supply chain delays and hikes in import and export costs are currently commonly reported. Options to navigate your way around these challenges may be to increase stockholdings. In the long run this may provide for improved profit margins. But consider the impact on cash flow. Alternatively, you could consider adding new suppliers with different payment or shipping requirements, or which manufacture locally.
6. Cut unnecessary costs
Review your company expenses and see if there are any costs you can easily cut back on. Look at recurring costs in particular. Are you paying for subscriptions you no longer need?
7. Sell non-essential assets
You could sell assets that are unproductive or no longer used to generate cash.
8. Convert old inventory into cash
Clear out old and excess inventory that is typing up capital, for example by discounting items, selling them on online marketplaces, or bundling them.
9. Lease rather than buy
Leasing equipment rather than purchasing it upfront could allow you to preserve cash flow. Having a series of small, fixed payments should also make budgeting easier. If you’re already leasing, consider renegotiating the terms.
While this route could improve cash flow, you would also need to consider the overall cost, as it could end up costing you more in the long run. Read our blog post How to use asset finance to grow your business to learn more about the various types and benefits of asset finance.
10. Incentivise early payments
If your profit margins allow, offering discounts on early payments to selected customers might be an option to strengthen cash flow.
11. Offer multiple payment options
Making it easier for customers to pay you will help you get your money quicker. Provide them with several options, including credit cards, online payments, and electronic transfers.
Ultimately, cash flow is the lifeblood of your business and can give you the platform you need to effectively manage and develop your company’s future. Taking advice from an accountant could help you understand your cash flow better and spot potential problems early on.