Good cash flow management is the mainstay of any business, whatever its size. Ensuring that a steady stream of cash enters your bank account to cover expenses and make a profit can mean the difference between success and failure.
A report* last year by Xero, the global small business platform, revealed that the average UK small business experienced cash flow ‘crunches’ – where monthly expenses exceed revenue – for over four months of the year, and 23% experienced them for more than six months of the year.
Cash flow management involves monitoring the money coming into your business and checking it against your outgoings such as tax, suppliers’ bills and rent. Regular cash flow management provides a day-to-day perspective on exactly where your money is going. As a result, you’ll be able to forecast profits more accurately, plan opportunities for further investment and growth, and ensure you have enough put by for unexpected outlays and the all-important tax bills.
There are a number of red flags in cash flow management which could indicate that your business might be heading for financial difficulties.
Late or missed payments from customers
One of the biggest problems for accurate cash flow management is late payments. It’s important to keep on top of them as the situation can snowball, reducing your cash flow, forcing you in turn to pay your suppliers later than you would like and possibly incur late payment penalties.
An unexpected negative cash flow
Small businesses can find it difficult to set money aside for unforeseen emergencies. An important customer going out of business owing you money, an IT issue involving major external input, or the sudden malfunction of a vital piece of machinery can all force you into negative cash flow – and once that’s happened it can be difficult to find extra cash to cover your everyday costs. It can also affect your business’s credit score.
You’re spending too much time moving money around
If you’re regularly having to juggle cash from one part of the business to another to cover costs, it’s not a feasible way to keep solvent and urgently needs addressing.
To keep your business on track with managing cash flow, make sure you have some practical strategies in place:
Invoice your customers straightaway
After all, the sooner you send an invoice, the sooner you’ll get the payment. Ensure that your invoices contain clear and easily visible details about the due date for payment.
Use a specific accounting software package to keep track of your cash flow
An accounting package such as Xero or Sage will save a lot of time by computerising your business processes such as invoicing and recording sales receipts. It will also give you that essential overview of cash flow at any time you need it.
Have a system in place to chase late payments
You can schedule reminders from your accounting software to make sure you chase late payments immediately. As an incentive to pay on time, you can offer a discount for early payment, but, conversely it’s sensible to make it clear that late payment will incur a fee, which will increase with every missed deadline.
Offer a selection of payment options for customers
The easier you make it for your customers to pay you, the more likely they are to pay promptly. You can include an online payment link on electronic invoices generated from accounting software and ensure all payment methods are covered by taking both credit and debit card payments, using a card reader, QR code or mobile payment link.
Get to grips with your cash flow management
As a business owner, really grasping how your cash flow works can be a daunting prospect, and it’s easy to put it off or ignore it altogether. But time spent gaining a genuine understanding of how it works can only benefit your business and could save you from serious financial problems.
If cash flow management is getting you down, the experienced team at AMR Bookkeeping Solutions can help. Contact us on 01892 559480 or have a look at our website to see how we could help you.
*’Crunch – Cash Flow Challenges facing Small Business’ July 2022. Produced by Xero and Accenture for Xero Small Business Insights.
