Managing Cashflow in Your Small Business

Cash is the lifeblood of your business. We look at the steps a company can take to ensure it has a healthy bank balance at all times

Managing Cashflow in Your Small Business

It is no exaggeration to say that cashflow is the lifeblood of your business. You can be as profitable as you like, but without ready cash in the bank to fulfil your obligations, your business could run into serious trouble.

In this article, we cover the basics of cashflow management for businesses. You will learn about the main elements which affect cashflow, and how to use them to draw up a cashflow forecast, which you can use to deal with problems before they occur.

Finally, we look at how you can use credit control, cost control and sales to improve cashflow, and the various external finance options available to boost your financial health.

What makes up my business’ cashflow?

Essentially, your cashflow refers to your actual cash balance at any one time. When looking at cashflow, you are only interested in money that actually goes into and out of your business; debts you owe or are owed are immaterial until money changes hands.

The main components affecting cashflow include sales revenue, external finance, fixed costs, variable costs, VAT, tax and National Insurance, and finance costs.

Usually revenue from sales will make up the bulk of your incoming cash. If you are a business-to-business customer which operates on credit terms with customers, setting up a proper credit control system will ensure you minimise the harm to your cashflow from late payers. External finance is one of the next big elements in your small business’ cashflow. Investment, loans and overdraft finance and alternative sources of finance can provide a shot in the arm to your cashflow when it is most needed. Coupled with proper cashflow forecasting, you can ensure that your business is never short of ready capital at a crucial time.

Next up is fixed and variable costs. Fixed costs are costs which are not tied in to sales volume, such as staff salaries, office rent and other overheads. Salaries will often represent your business’ largest expense, and one it is particularly difficult to cut down on. Variable costs are costs that are tied to sales volume, such as the cost of stock or expenditure on an ongoing project. Cashflow problems often arise when high variable costs go unaddressed due to late payment from customers.

VAT, Tax and National Insurance will represent another significant expense, but as they are paid out in regular instalments they should be relatively easy to forecast. And finally, if you have taken out a loan or overdraft, interest payments and other expenses will form a part of your outgoings you must account for.

How can I forecast my cashflow?

Keeping your cashflow under control is crucial for the survival of your business, especially in the early stages. Key to doing this is preparing a proper cashflow forecast. You can do this easily using accounting software – you simply use the budgets you have created in the program to automatically create one. If you don’t have accounting software, you can do it manually by following these steps.

Start by creating a sales and expenditure budget. Be conservative with your sales estimates and pessimistic with your cost estimates. Find out how to create budgets by reading this guide.  After this use the budgets to create cashflow forecasts. Starting with the cash you have in the bank now, use your sales and expenditure budgets to predict how much ready cash you will have on a month-by-month basis. Remember to be realistic at all times – if you have a 30-day credit agreement with a customer, the day you make a sale will not be the same day you are paid.

Make sure to continually update your cashflow forecast based on actual performance. Do this at least once a month (accounting software will do this for you). Ensure you have an accurate picture of your cashflow situation at all times.

The benefits of a cashflow forecast

First of a cashflow forecast will help you to Predict shortfalls. You can use cashflow forecasts to work out when your business will be short of cash and therefore arrange finance (e.g. a loan) well in advance to ensure you have dealt with the problem before it occurs, or cut down on costs.

It will also help with planning financial commitments. Your cashflow forecast should be used to work out whether you have the means to take on a large financial commitment, such as investment in new premises or fulfilling a major new order.

Finally a cashflow forecast will alert you to problems early. Make sure you are notified of problems like lower-than-expected sales levels, an unexpected increase in costs, or invoices which are likely to be paid late or not at all. You can then use the cashflow forecast to see whether your business can handle the issue or whether you need to take urgent remedial action.

How can I boost my cashflow through sales and marketing?

Careful management of your sales and marketing activity will ensure your cashflow outlook stays positive. Follow these tips:

Consider increasing prices

Although this is likely to lead to a short-term decrease in sales, if it is done smartly it will lead to greater profits – and hence improved cashflow – in the long term. It goes without saying that you should only do this if your business can handle the short-term revenue shortfall.

Avoid overtrading

It is all too easy to become insolvent by overstretching yourself and running out of cash fulfilling orders before payment is received. You may have to turn down orders or arrange finance to cover your expected costs ahead of time.

Invoice straight away

The quicker you invoice, the quicker you get paid. Make it a policy to have an invoice ready to go as soon as work is completed.

Link sales commission to payments rather than orders

Not only will this ensure you don’t end up paying commission without making revenue from sales, it will motivate your sales staff to chase up customers for payment themselves.

Negotiate better terms with customer

Deposits and staged payments will make it easier to keep on top of your cashflow. Make sure you and the customer have agreed upon a detailed specification for your work – this will minimise the chance of them disputing an invoice and holding up the flow of revenue.

Change your strategy to suit cashflow goals

If you need ready cash now, you could try a short-term marketing drive which will generate a number of one-off orders, for example. Consider offering discounts to customers for prompt payment.

How can I boost my cashflow through credit and cost control?

How to boost cashflow through credit control

Here’s a few credit control steps you can take to improve your cashflow. For instance you should make sure to use a credit scoring system to offer individual terms to customers. Rather than offering a flat payment period (e.g. 30 days) to all customers, use an online credit check service for new customers – and potentially your own criteria for existing ones – to offer individual terms reflecting their ability to pay invoices promptly.

Make sure to send invoices immediately following completion of work. Especially with larger companies, this should be accompanied by a follow-up call to the relevant person ensuring everything was OK with the invoice and nothing is disputed.

Finally charge interest and chase up late payers. Set aside a period of time a week to do this methodically, starting with the largest debts and moving on to the oldest ones. You have the legal right to charge interest on late payments.

How to boost cashflow by controlling your costs 

Start by shopping around for suppliers. Never go for the first quote you see. Make sure you thoroughly research the market before making any kind of major expenditure, and never discount the possibility of second-hand equipment as a cheaper way of kitting out your business.

Also set up cost control systems: procedures and policies to keep on top of cost will be a major component in boosting your cashflow outlook. And keep control of stock levels. You can use accounting software or supply chain management software to monitor levels of stock and only buy in what you actually need. This will cut down on expenditure, storage costs and wastage. For more help on how to cut costs in your small business, check out our tips piece here.

What new funding can I arrange to address cashflow problems?

There are a number of different funding options small businesses can use.

From traditional routes like overdrafts and loan finance to alternative finance options like invoice finance (raise cash using outstanding invoices as security), asset finance (agreements that spread out the cost of expenditure on major assets, using the asset itself as security for the finance) and investment and equity finance there are now a number of different ways small businesses can get a cash injection.  For more information on the different options you have, check out our sister site’s raising finance section here.

Managing your cashflow is essential to your business’ success and survival; it will help you budget, raise finance and plan for growth. For more information on planning for your company’s future, check out our section here.

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