Glossary

Cash Flow Management

How to Manage Cash Flow

It’s not an exaggeration to say that cash flow can make or break your business. That’s why effective cash flow management is seen as one of the most important factors in survival and success, no matter your size or industry.

Managing cash flow not only gives you an accurate picture of the money that’s going in and out of your business, it also allows you to plan for growth and potential challenges ahead too. So, to help you get a handle on your business’ books, below we break down:

·       What cash flow management is

·       Why managing cash flow is important

·       How to manage cash flow

·       Common cash flow problems your business could experience

·       How to improve your cash flow management

What is cash flow management?

Cash flow describes how money comes in and goes out of your business over a given period of time. That means balancing regular expenses, growth investments and cash reserves against sales and accounts receivable.

Cash flow management is the monitoring of this balance, whether on a weekly, monthly or quarterly basis, and can help to guide your decision making as a business owner.

There are two kinds of cash flow that you may experience:

·       Positive cash flow: More cash is coming into your business from sales and accounts receivable than there is leaving it through expenses, giving you spare money to save or spend on growth.  

·       Negative cash flow: More cash is leaving your business than there is coming in, restricting your ability to pay salaries and bills and reducing opportunities to grow.

Cash flow vs. revenue and profit

While revenue and profit are important figures to track and celebrate, managing cash flow paints a more realistic picture of your business’ immediate financial flexibility.

Revenue measures the money coming into your business through sales, then profit is the amount of revenue that’s left over after paying all your expenses. But earning revenue doesn’t always increase usable cash right away due to issues like customer payment periods – and taking on an expense won’t always decrease cash immediately either.

This means your business could be profitable with negative cash flow and vice versa. Cash flow management simply tells you when you’ll have cash readily available.

Why is cash flow management important?

Managing your cash flow helps you figure out:

  • If and when you’ll have cash available
  • If and when you’ll need to get more of it
  • If and when you should control your spending to avoid a shortfall

With a clear understanding of positive cash flow, you’ll have the confidence and freedom to invest in your business when you need to. Most growth opportunities require investment before achieving the higher revenue that they’re designed to bring. Whether moving premises, buying equipment or stock or hiring staff, all these scenarios rely on having cash available upfront.

On the other hand, having awareness of negative cash flow can help you take action to meet your financial commitments and ultimately avoid disaster. That might mean boosting the cash coming in or limiting what goes out. Either way, effective cash flow management will make sure you can continue to pay staff, bills and other expenses, and keep your business going.

How to manage cash flow in your business

We’ve talked about monitoring the money that’s going in and out – but how do you actually do that?

The good news is that there are a wide range of accounting tools out there to help you track your cash flow in one place. Or if you don’t have the time or confidence to manage it yourself, you could hire a professional accountant instead.  

You (or your accountant) should:

·       Keep accurate records of all your business’ transactions

·       Generate regular cash flow statements

·       Analyse the data to spot opportunities to increase cash flow or deal with shortages  

You can then create realistic cash flow projections using your previous numbers to plan for busy and quieter periods. It’s smart to monitor your cash flow regularly – monthly for example – to allow you to update these projections and adjust to changes in revenue and expenses as you need to.

What can cause problems with cash flow?

Unfortunately managing cash flow is rarely straightforward. Various challenges can crop up from time to time and put paid to your plans. Common cash flow issues your business might face include:

Long payment periods

Long delays between sending invoices and receiving payment can leave you struggling for cash in between. Taking on a job or fulfilling an order often means investing in materials, equipment or other resources upfront, all of which can cause a shortfall until the money comes back in from the customer.  

With no agreed payment date, your customer is legally required to pay within 30 days. Longer payment terms are common in certain industries such as construction however.

Unexpected revenue dips

You can predict and plan for recurring quiet periods if your business is affected by seasonal demand. But if you suffer a surprise dip in revenue and haven’t got the cash reserves to cover it, you could be left in a tight spot financially.

Common reasons for declining revenues include:

  • Supply issues that affect your production capacity
  • Drops in demand due to shifting consumer habits or new competitors
  • Economic problems that reduce customer spending 

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Increased expenses

Seeing your outgoings increase will also put a strain on your cash flow. Regular expenses such as materials, rent, utilities and licenses can all go up in price from time to time. Unexpected costs like equipment repairs meanwhile often can’t be avoided if you need them to continue working.

Other times your expenses may go up because of overinvestment, like buying too much stock or launching a marketing campaign that doesn’t pay off.

How to improve cash flow management

Whether you face any of the above challenges or not, there are lots of viable ways to boost your cash flow too. Below are six of your best options – regular cash flow management can help you spot when they’re needed.

Increase revenue

It may sound obvious, but increasing revenue is usually the most attractive and sustainable way to boost your cash flow. Doing so might involve:

·       Attracting more customers

·       Increasing how often customers buy from you  

·       Putting your prices up

Cut costs

The opposite strategy is to reduce the amount of cash going out of your business and give yourself more to work with that way. That might mean:

·       Finding cheaper suppliers

·       Making production processes more efficient

·       Downsizing your office or warehouse

·       Changing marketing tactics

·       Cutting back on unused or expensive staff perks

Collect invoices faster

Getting paid faster is another obvious-sounding but effective way to boost your cash flow. There are a few ways to do this too:

·       Send out invoices promptly and in a straightforward way, with information such as the amount owed, due date and accepted payment methods all clearly highlighted

·       Shorten payment terms, from 90 days to 30 days for example

·       Offer small discounts to incentivise paying early

·       Ask for deposits or part-way instalments

·       Accept more payment methods to allow customers their preferred method

Lease instead of purchase 

It might seem counterintuitive as the overall cost will be higher due to interest – but hiring equipment instead of buying it will free up more cash for other expenses. And if your business buys equipment on lease, you can claim it as a business expense and save money on taxes.  

Make use of assets 

Trading assets for money is another option if your cash flow deficit gets serious. It’s helpful to have an idea of which assets you can afford to sell in this scenario – though you could also put them to use as collateral for securing finance.

This way you can keep hold of assets while solving your cash flow problems too.

Get external finance

Taking on a loan or another financial product is a popular option for businesses looking for cash to help them grow. There are various finance options out there designed to help you raise funds fast – including our own Cash Flow Finance.

Manage your cash flow better with Nucleus

We’ve helped thousands of UK SMEs to solve their cash flow management challenges and push forward. Our Cash Flow Finance offers fast unsecured loans for almost any business purpose you might see fit, whether that’s expanding your premises, buying extra stock or covering an unexpected bill.

Read more about how Cash Flow Finance works or get in touch to speak with our cash flow experts.

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