What does cash flow management mean?
Cash flow management means tracking the money coming into your business and monitoring it against outgoings such as bills, salaries and property costs. When done well, it gives you a complete picture of cost versus revenue and ensures you have enough funds to pay your bills whilst also making a profit.
By understanding your cash flow you’ll be able to forecast company profits more accurately and identify opportunities for investment.
Regardless of how much work you have in the pipeline, unpaid invoices from customers can lead to a black hole that cannot be filled simply by increasing revenue.
Avoiding cash flow problems doesn’t need to be complicated, but it’s absolutely key to the success and indeed survival of your business.
Why bad cash flow management is bad news for SMEs
All business owners will want to avoid cash flow problems. However, due to their size and ability to access financial resources, SMEs are often disproportionately affected by negative cash flow.
Where a larger business may have funds available as a stop-gap between late payments, smaller businesses rely more closely on their predicted monthly income to ensure their financial commitments are met. In serious cases, business owners can be left with no choice but to use personal funds to keep their business afloat.
For ambitious businesses looking to grow, long term negative cash flow can put these plans on hold. Instead of investing time and energy into thriving, business owners will be left scrambling to stay afloat month by month. It’s no wonder that research by QuickBooks found that 71% of small business owners have lost sleep worrying about the cash flow of their business.
According to one report, small businesses in the UK are owed on average £6,142. Not surprisingly, late payments can also impact your mental health, with more than a quarter of small business owners saying they worry about late payments when not at work. Researchers found that 17% say payment delays undermine their confidence to run a business, while 16% worry about the issue every working day.
One way to maintain positive cash flow is running regular credit checks on your client and suppliers. Before entering into any contract, tools such as Experian Business Express can show you their business credit rating, highlighting any warning signs early on. Importantly, you can also run credit checks on existing customers to see whether they are experiencing financial difficulties that puts your business at risk.
How to know when it’s time to improve your cash flow
Without a proper understanding of what cash flow is, it’s easy to miss early signifiers of potential cash flow problems.
There are a number of common signs that your business may be soon facing financial difficulties – but they will only become clear once you’ve created a budget, set clear cash flow targets and are on top of your reporting. But what are the warning signs to look for?
- Your business is making late or missed payments
If you notice that your unpaid invoices are starting to pile up, then you might have a cash flow problem. But even with automatic reminders set up, it’s impossible to pay your business bills if the cash just isn’t available. Whether late or missed payments are down to poor admin or no cash, they can result in a low business credit score, impacting your ability to secure finance, find suppliers and build partnerships.
- You have a negative cash flow
While many business owners keep a close eye on cash flow, a sudden financial shock – like a client going out of business or machinery breaking down – can quickly put you in the red. Once this happens, it’s very difficult to increase your revenue quickly enough to cover your costs. It’s therefore vital that you take as many preventative steps as possible, so you’re prepared for anything. Just as important as monitoring customers’ credit scores is monitoring your business’ own credit score using My Business Profile. If your own finances are robust, you should be able to secure cash flow loans or finance for new equipment.
- You’re missing discounts on accounts payable
Many vendors offer early payment discounts, helping to ensure their own cash flow health and giving you a financial advantage. If you’re paying most accounts payable in full and missing out on these discounts, you may be setting yourself at a disadvantage which could lead to a cash flow problem.
- You’re constantly juggling funds around to cover costs
With a positive cash flow, managing your costs will be simple. You’ll know exactly what is coming in and when, so you can set up payment terms on your outgoings that won’t be missed. It’s time to improve your cash flow if it’s a monthly struggle to keep up with your financial obligations.
The three ‘pillars’ of cash flow management
We’ve mentioned before that cash flow management doesn’t need to be complicated. In fact, it can be summarised by three ‘pillars’.
Pillar 1: How much money you’re generating
Every business wants to generate more revenue, but it pays to be strategic. Think about your pricing, promotions and whether you could diversify into other markets.
Concentrate on improving the quality of your product or service too, and invest in marketing and customer service to build brand loyalty with existing clients. With a high customer turnover your income could vary greatly each month, while businesses with returning trade can forecast more accurately.
Pillar 2: How much money you’re being paid
Generating more income isn’t effective unless your business is actually receiving the funds for its services. Make use of credit checking services, such as Experian Business Express, to reduce your financial risk before entering into any new professional relationships.
Send invoices promptly and automate late payment chasers to increase the chances of early payment, and don’t be scared to enforce late payment penalties too.
Pillar 3: How much money you’re spending
If you rent office space or other premises, negotiate better rates with your landlord and other suppliers. Printing, travel, utilities and so on all add up, so always shop around and make sure you’re getting the most competitive rates.
Spend some time reflecting these pillars in your business, and then take the next steps to boost your cash flow management.