Let’s start by covering some basics. Cash flow is the movement of money in and out of a business, representing its operating activities, investments, and financing obligations. It is a vital aspect of a company’s overall well-being, and it would not be an exaggeration to say that cash flow health can make or break a business. It is also why cash flow management is deemed one of the most important factors on which the ultimate success of a venture depends.
Looking at recent stats released by CBinsights, we find a study showing that 38% of UK SMEs pre-pandemic were failing due to cash flow problems. This is a significant number, demonstrating not only how essential cash management is to the success of a business, but why it’s critical to thoroughly monitor the ins and outs. At its root, a positive cash flow means a company has more money coming in than going out, while a negative one implies the opposite.
Cash flow management is the process of monitoring, analysing, and optimising the flow of money in and out of a business, taking into consideration specifics like investments, purchases, bills, and most importantly, payroll. It involves strategically planning and controlling financial resources to ensure a company can meet its obligations and pounce upon expansion opportunities.
An effective management strategy is crucial for long-term success and sustainability, but not only that, it also brings peace of mind to business owners who can operate in the confidence that their enterprise is in good shape. It helps maintain financial stability, minimises risks due to the oversight of finances, and as a result, supports continuous growth.
In the following sections, we will explore various methods and ideas on how businesses can effectively manage their cash flow, enabling them to thrive in today’s competitive market.
It cannot be understated how essential effective cash flow management is for running a successful business operation, no matter its scale. It’s important to consistently monitor your ins and outs, update forecasts, and maintain a realistic view of your financial situation. By doing so, you will be better equipped to make informed decisions and tackle challenges that come your way.
With solid planning and a transparent view of all aspects of incomings and outgoings, along with prepared monetary sums set aside thanks to those accumulated financial projections, businesses can be prepared to take on financial obligations without running the risk of failure. If you slip into negative cash flow, it’s not the end of the world, however negative trends can take their toll, not just on the company’s health, but also the mental wellbeing of its owners.
A pre-pandemic Quickbooks survey reported that 57% of UK SMEs were actively struggling to maintain a positive cash flow, with a deeper analysis revealing that 54% of these businesses were trying to manually record their cash flow records through methods like Excel spreadsheets, creating the risk of errors, and an uphill struggle going forward.
It should be noted that a business can be profitable and still struggle with cash flow. Some also argue negative cash flow is not necessarily a bad thing, however, that is only true in the case of large companies that hold sufficient reserves to brace the impact of short term fluctuations and liabilities.
One of the fundamental steps in effective cash flow management is monitoring your ins and outs on a regular basis, whether through accounting software or reviewing financial reports in person.
By keeping a close eye on the funds coming in and going out of your business account, and sifting through exactly what the money is being spent on or what is generating it, you can identify potential issues like overspending, or incorrectly overpriced bills.
Regular monitoring will quickly reveal trends and present opportunities for savings and improvements, it will also allow you to make informed decisions going forward, ensuring your business remains stable and able to deliver on its commitments.
A cash flow forecast is a valuable tool that helps predict the inflows and outflows of money in your business over a specific period. (A monthly forecast model is typical). If you are aware of merchant price changes for example, you will know your outgoings are going to increase and can update your records. Constantly adjusting your cash flow forecast means you can identify any deviations from your initial projections and make alterations as needed.
This proactive approach allows you to adapt to changes in your business environment and maintain a positive cash flow. Regularly revising your forecast also ensures that it remains an accurate reflection of your business’s current financial situation, meaning your decisions will be based on up to date information.
It’s crucial to be honest about the state of your cash flow. Overestimating your income or underestimating your expenses can lead to poor financial decisions and ultimately harm your business. Brushing problems under the carpet will only lead to larger issues down the road. By regularly reviewing your cash flow situation, you can identify areas that need improvement or alteration and address them immediately.
A frequently revised pricing strategy will ensure your products or services are competitively priced while also maintaining profitability. Implementing stringent credit control processes can also help you reduce the risk of late payments or defaults from customers, ensuring you receive payments in a timely manner while maintaining a steady stream of income.
Taking a proactive approach to managing your cash flow involves anticipating potential issues and addressing them before they escalate. This includes monitoring your accounts receivable, following up on late payments, and as already discussed, maintaining an up to date cash flow forecast to stay ahead of challenges.
Staying agile and being open to change in your industry or market is important for maintaining monetary health, and even being able to capitalise on new opportunities. Keep an eye on emerging trends, competitors, and economic shifts, and adjust your business strategies accordingly. Being able to pivot and respond to changes quickly will help you maintain a competitive edge amongst competitors who might not be so willing or prepared to adapt.
There are various cash flow finance options available to businesses, such as invoice financing, lines of credit, and business loans. These can be useful tools to help bridge cash flow gaps when they arise. Be open to considering these options when necessary, but ensure you are aware of the costs and benefits associated with each before committing to a specific solution.
Streamlining your cash management processes can make it easier to stay on top of your enterprise’s overall well-being. Implementing automated invoicing and payment systems is suggested, (something we will cover later), conducting regular cash flow audits, and seeking the advice of financial experts to optimise your strategies. By automating and simplifying cash flow management, you can focus on growth with the peace of mind that your business is in great shape.
Effectively managing cash inflows and outflows is another key to optimising your business’s financial circumstances. We touched on it in our introductory paragraphs, discussing how this entails monitoring your income sources, tracking expenses, and ensuring your business is operating as a well oiled machine. By understanding your cash inflows and outflows, you can continue to make informed decisions.
Prompt invoicing and a consistent follow up on payments will help ensure your business receives the funds it’s owed in a timely manner.
A 2022 Barclays report from over 500 UK SMEs revealed that 58% of them were waiting on late payments. That is a staggeringly high number, and although there could be many variables as to the reasons for those delayed funds, it shows how common postponed payments can be, and why it’s important it is to establish a clear invoicing process, while implementing payment terms that suit both your business and your clients.
By staying on top of invoicing and payment follow ups, you can minimise the impact of late invoices on your enterprise’s monetary health. Having an individual familiar with and dedicated to the oversight of this process could also be well worth the long term investment.
Optimising your existing assets can help generate additional income and improve your cash flow. This could mean renting out unused space, selling idle equipment, or even licensing intellectual property. By making the most of your assets, you can create new revenue streams and bolster your cash position.
Leasing or financing capital assets, such as equipment or vehicles, can help preserve your cash reserves and spread out the cost of acquiring these assets over time. This approach can free up cash for other business needs and reduce the upfront financial burden of purchasing expensive assets. This can be particularly helpful for startups who are still trying to establish themselves and do not have the excess funds to invest yet.
Building a cash reserve can provide a safety net for your business in times of financial uncertainty. Regularly setting aside a portion of your revenue will create a buffer against unexpected expenses or downturns in the market. Having a contingency plan in place can also help enterprises navigate challenging situations more effectively, protecting your cash flow and allowing you to operate with the confidence of having an established financial net.
No business is immune to the challenges that come with poor cash flow management. However, it’s important to remember that encountering cash flow issues does not necessarily spell doom for your company. By understanding the root causes of poor cash flow and learning how to effectively deal with them, you can navigate through difficult financial periods and emerge even stronger. Keeping track of your cash flow and staying proactive in addressing issues will ultimately help secure the financial stability required to succeed.
We have already established that poor cash flow can be attributed to several factors, including late or unpaid invoices, high overhead expenses, inadequate gross margins, inefficient cash inflow and outflow management, no forecasting, and a general lack of planning.
If you are yet to start taking cash flow management seriously, and have started experiencing monetary troubles, the sooner you can identify the cause or problem area, the sooner you can start addressing the situation, which should include setting up a management plan to avoid future problems.
Bringing things together then, and stating something that bears repeating, dealing with poor cash flow requires a proactive and strategic approach. Identify the causes, then implement measures to address them. With a well thought out and prepared cash flow plan, a negative can be resolved and avoided in the future altogether.
Immediate solutions may involve renegotiating contracts with suppliers, adjusting your pricing strategy based on the market, improving your invoicing process through the utilisation of software, or exploring alternative finance options. You may also consider other factors we have looked at, like reducing overhead expenses, making better use of your existing assets, and building cash reserves to safeguard your business against financial challenges.
By staying informed about your cash flow situation, you can make timely adjustments and informed decisions to ensure your business remains financially stable. It’s also a good idea to establish a routine for analysing your financial reports and performance indicators, allowing you to identify trends, spot potential issues, and implement corrective actions as needed.
Leveraging accounting software can significantly streamline the cash flow management process. Modern accounting software is designed to help businesses monitor income, track expenses, generate financial reports, and provide real time insights into their financial health. By incorporating accounting software into your cash flow management strategy, you can drastically improve efficiency and eliminate the chances of human error that comes with manually filling in excel spreadsheets.
Open accounting refers to the use of transparent and easily accessible financial records, which can be particularly beneficial when managing cash flow. By implementing open accounting practices, you can have a clear overview of your business’s financial health at all times.
Open accounting streamlines this process by automatically tracking income and expenses, generating financial reports, and providing real time awareness into your cash position. With open accounting, you can make informed decisions to optimise cash flow and ensure your business operates efficiently.
In the dynamic financial landscape, open banking provides a way for third-party financial service providers, like accounting software, to gain access and interact with your bank account information. This synergy significantly enhances cash flow management, enabling meticulous monitoring of transactions, efficient tracking of expenses, and effective analysis of financial data.
By creating a connection between your bank account and your accounting software, the reconciliation process is automated, providing real time updates on your financial status, and preemptively identifying potential cash flow hiccups before they balloon into significant problems. Open Banking streamlines cash flow management and offers invaluable insights to make better, more informed financial decisions.
Open source bookkeeping software is freely accessible and can be tailored by users to meet their unique needs. These software solutions offer robust tools for managing cash flow, including budgeting, invoicing, expense tracking, and financial reporting.
This software presents an affordable alternative to proprietary solutions, particularly for startups and small businesses with tight budgets. By leveraging open source bookkeeping software, you can proficiently identify cash flow trends, spot potential issues, and ultimately safeguard the financial stability of your business as it scales up.
Should you find yourself dealing with cash flow challenges or believe there’s room for improvement in your financial management, do not hesitate to reach out to our team of funding specialists. We’re here to offer guidance and support to help you navigate your financial situation, and can talk through facility options if you feel it could be to your benefit. You can contact us at Nucleus on 020 7839 9451 or email [email protected].Back