Business man with Piggy bankRoadblocks to business growth – cash flow

(See our Ultimate Guide to Business Growth for more information)

Cash flow is the lifeblood of every business. Fail to manage your cash flow correctly, and you will be putting your business at risk.

Cash flow management is the process of tracking money coming in and going out of your business.  This can include property rental to your company and any other money going out of your business. It will ensure you have enough funds to pay your bills and enable you to assess what profit your business is making.

When you manage your cash flow effectively, your business will be healthy, you will be in a better position for growth or investment, and you will be creating a secure future for yourself and your staff.

Internal factors that impact cash flow

Several factors can impact your cash flow. Some of these are internal; in other words, they are mostly within your control.  Look out for the telling signs – being regularly short of cash is usually a good indicator that you are not managing your money effectively.

  • The first consideration is to ensure your business is making a profit; in other words, you have more revenue coming into your business than your overheads.
  • Poor visibility of your debtors, creditors and stock position can cause significant cash flow problems. A typical example of this is a successful retailer that moves to larger premises without considering the need for more stock, higher rent, or extra staff.
  • Poor management and lack of internal controls can result in getting behind with your payments which can incur late penalty fees.
  • Buying or selling more than you need will strain your cash.
  • Over capitalising on purchasing assets without seeing a reasonable return on your investment.
  • You have borrowed too much money to fund your business and struggling to make the repayments.
  • Many business owners fail to set aside cash to pay the annual tax bill, and this can be particularly difficult during the first year of trading when you are expected to pay for the second year upfront.
  • If you regularly take too much cash out of your business for your personal needs, you will severely strain your cash flow.

External factors that impact cash flow?

Challenging economic times have a massive impact on businesses, you may find a drop in your revenue and profits, and at the same time, expenses may continue to increase. Whilst these factors are not within your control, effective cash management can make a massive difference.

  • Political, economic, social and technological advancement can all seriously impact your business.
  • Rising interest rates
  • New competitors coming to market

Poor cash flow can affect your mental health 

Managing cash flow effectively can make a difference. If you don’t pay your bills on time, you may face late fees, penalties, and damaged relationships with your suppliers and customers, which can put your business at risk and harm your mental health.

*Approximately half of Small to Medium Enterprises (SMEs) report that managing cash flow is a significant issue (Dept. of BIS survey 2016).

Poor cash flow will impede your business growth.

If you are embarking on a business growth strategy, remember that as your business grows, so do your outgoings! Finding yourself regularly short of cash may be a sign that you are not managing your cash flow effectively. And if you are growing fast, you will likely experience cash flow problems more frequently,

Learning how to manage your cash flow effectively will give your business growth strategy the best chance of succeeding. Look at our 12 tips designed to help you manage your cash flow more effectively and avoid the stress of being cash-strapped.

Read our Ultimate Guide to Business Growth for other Roadblocks to Business Growth.

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Managing cash flow – how to ensure that your business doesn’t become a casualty

#1 Be clear and agree to your payment terms upfront before doing any work

Many small businesses need to do this and are often taken advantage of. Do you have the Terms and Conditions on all paperwork?

#2 Invoice products and services as soon as you can

Ask for deposits and, at worst, invoice on the day of completion. The clock starts ticking on your payment terms when your customer receives, or evens accepts your invoice.

#3 Know your customer’s payment process

If you need an order number, know who to ask and obtain order numbers up front before starting work.

*According to a survey by Dept. for the Business Energy and Industrial Strategy, 24% of UK businesses reported late payments as a threat to their survival.

#4 Offer discounts for prompt payment

If your payment terms are 30 days or more, consider offering a 1-3% discount for payment within five days, a much cheaper way of improving cash flow than a loan or invoice discounting.

#5 Protect yourself against bad debt

Regularly credit check existing and new potential clients. That new customer you may have gained a large order from may be a slow payer or in financial difficulty.

#6 Chase debtors

Send timely statements and reminders. Also, a phone call rather than an email to those who owe you money will be more effective. An online accounts system is an excellent way to track and manage debtors.

#7 Don’t offer your customers extended terms unless you fully understand the risks

They may have cash flow issues themselves, compounding yours. Put repeat offenders on the stop!

#8 Understand your tax liabilities

Approximately 30% of your revenue, takings, and bank balance differs from yours! If a VAT is registered, ensure you keep a tally each month of your quarterly VAT bill. Likewise, plan for any corporation tax or personal tax that is due. A good tip is to set up a second business bank account and continually top this up each month with any surpluses to pay VAT and tax bills. HMRC is usually the first to file for insolvency proceedings due to debts owed by businesses.

#9 Pay your suppliers on time

Ultimately you need to keep a good relationship with your suppliers to continue trading, and on occasions, you may also need to lean on them for extended payment terms.

#10 Have a good relationship with your bank

Talk to your bank if your business is seasonal or you will have a few quiet months. They will likely be more supportive, particularly if they can see you manage your business well by having the necessary controls in place.

#11 Asset rich, cash poor?

Only tie up some of your cash in assets; you could rent and lease equipment from cars, vans, forklifts, machinery, printers, photocopiers, and office furniture. Whilst this may seem more expensive, at least you won’t have your cash tied up. There may be some tax advantages too. Outsourcing or using subcontractors may also be more cash efficient than having too many employees on your payroll, giving you flexibility at quieter times or if workloads can be unpredictable.

#12 Turnover is Vanity, Profit is Sanity, and Cash is Reality!

Don’t chase turnover; chase margin!

*The Office for National Statistics (ONS) states that only 45% of start-up businesses survive five years, and 70% of VAT-registered businesses don’t trade past ten years. Several other studies show that 80% of small business failures are due to managing cash flow poorly.

If you are experiencing stress due to poor cash flow management, please don’t suffer in silence. We want to offer you a free business health check and a no-obligation chat with one of our advisors where you can confidently discuss your challenges with someone who can provide you with some advice. Find your local advisor here.