There’s an old saying in the business world: “turnover is vanity, profit is sanity, but cash flow is king”.
Understanding and managing your cash flow is a vital part of running a successful business. A huge turnover with plenty of sales might look pretty, but it means very little if your financial outgoings are equally large, or the cash that you’re owed isn’t arriving on time (or at all!).
What is cash flow management?
At its simplest, cash flow management means ensuring the sum of the money coming into your business is greater than the sum of your outgoings.
Ineffective cash flow management is one of the top reasons so many British startups go belly-up in their first few years. It’s super important to get on top of how money arrives and departs from your business, and make sure that you stay on top of it!
How can I improve my cash flow?
There are a few cash flow essentials that you should be aware of when running your business:
Make sure you submit your invoices promptly in order to improve your chances of a quick turnaround and ensure everything is on time as promised.
Don’t let perfectly avoidable mistakes enable delays – make sure everything’s kosher before you send a final invoice. Half the problems with cash flow and late payments arise from delays in correspondence – don’t fuel that fire.
Keep it simple
Simple is always effective – try to cut out anything which may appear superfluous.
Include what you need, and stick to that. Don’t let complicated communications slow down responses from clients and suppliers.
Monitor your cash flow
Be vigilant about your payments and deadlines and make sure you chase up anything that needs chasing. Proactive reminders shouldn’t upset anyone and if there’s a problem, don’t allow it to develop into a monster!
It’s also worth negotiating payment terms with long-standing clients. Maybe you’ve still got that one client who insists they need 90 days to pay you – talk it out over a coffee and explain the adverse impact that wait has on your cash flow. You might even like to point out that the government’s guidelines say that a customer must pay you within 30 days of receiving your invoice, or receiving goods or services from you unless you’ve agreed on a different payment date.
A good way to ensure you have a constant flow of cash is to encourage clients to pay ahead of schedule. Providing discounts or credit for early payments is going to make it very appealing for clients to do so.
How much should you discount? Calculate how much the average late payment costs you, and work from there.
Charge a deposit
This is a good way of acquiring some cash up-front; it’s also good insurance in the event a deal falls through – providing you’re not contractually bound to return the deposit, that is.
Deposits can double as a rudimentary credit check too – if a client can’t come up with a small deposit, will they be equally difficult when it’s time to settle the balance?
If you have reservations about a client and want to go the more formal route, or if you’ve had previous dealings with them and their credit has been poor, then don’t make the same mistake twice.
Credit checks on UK limited companies are incredibly easy to come by, and it can be useful to get a professional opinion before extending credit to a client.
Expanding sales don’t necessarily equal profit
Mastering cash flow boils down to managing the relationship between your sales and expenses, and when you need to pay the latter. When sales are up, there can be a temptation to take your eye off the ball.
Don’t allow increasing revenue to lower your guard, as increasing sales usually mean increasing expenses. Don’t forget to plan for these expenses, and calculate any upcoming tax payments.
Crunch’s simple online accounting software can help you keep on top of your invoicing, expenses, and give you a clear picture of the financial health of your business.
Flexible beats cheap
Low price suppliers are not necessarily better than flexible payment suppliers – the lowest price isn’t going to matter if you haven’t got the funds in the first place.
Having more time is going to be much more helpful than a lower total cost in many cases. Keep this in mind when choosing your suppliers, and bear in mind your suppliers will have their own cash flow to worry about.
Watch this video to discover the most useful cash flow dos and don’ts for you and your small business.
Dealing with a cash flow emergency
If you don’t have enough money to pay your staff, rent or suppliers, you’ll very quickly find yourself in a tricky situation.
A sudden cash flow shortage can lead to a destructive cycle of overdrafts and credit fees which can be difficult to recover from, so always plan ahead, and always have cash reserves available.
If you do find yourself in a cash flow emergency, there are ways to tackle the situation and lessen the impact on your business.
Prioritise your payments
The first step would be to conduct a damage assessment of your cash flow and prioritise your payments accordingly. Remember that it’s very easy to fall into a ‘debt spiral’ with overdraft charges and late payment penalties mounting up. Clever planning is crucial.
We’re living in the gig economy and just about anything can be outsourced. Are you a journalist needing to transcribe a 10-minute interview? You can get it done for a fiver on, err, Fiverr. If you’re pulling down a day rate of £300, and work eight hours a day, then every hour you work is worth about £38.
If it takes you half an hour to transcribe that interview you might be losing out on an allowable expense to include in your accounts (about £19 after you take corporation tax into account). Plus you’ll be helping out a fellow freelancer!
Good relations with clients and suppliers
Perhaps more of a preventative than a cure, but maintaining a good rapport with your clients and suppliers will allow for some leniency and flexibility around temporary cash flow problems.
A good working relationship is going to go a long way – especially if you have a long-standing relationship and the supplier doesn’t want to lose your business.
If you need a quick cash injection but find the banks are shutting the door in your face, there are other options. Importantly, make sure you’ve sent out all your invoices and chased any late payments.
Alternatively, you may be able to get a short term loan from somewhere other than your bank, there are a number of finance companies that specialise in funding for businesses. There are also companies that will give you an advance on future invoices. Both of these options are likely to be expensive though. You could look at peer to peer lending, or even consider crowdfunding as a source of fundraising.
Marketing & Networking
Like it or not, marketing is part of good cash flow management. The feast and famine cycle is the classic freelancer problem – you land a big contract, get your head down for six months to finish it on time, then suddenly send your last invoice and you’re cut loose with no work and no immediate source of income.
Look at your assets and consider which are an absolute necessity. Could you manage without a particular item? If so, sell it off.
If you’re unwilling or unable to part with an asset, consider leasing it out. This will allow you to retain your assets and bring some cash into the business quickly.
Cash flow forecasting
A straightforward and sensible way to stay on top of the money flowing in and out of your business is through a cash flow forecast. This simply means calculating your income and your expenses and subtracting one from the other.
We’ve produced a simple-as-can-be weekly cash flow forecast to get you started. It includes line items for client invoices, supplier expenses, subscriptions and PAYE salary. Download the Cash Flow Forecast template.