19 Sept 2021
From making sure your cash flow forecast is up-to-date to considering business finance, there are lots of things you can do to manage your company’s cash flow effectively. Good cash flow management can help your business become more resilient and grow.
With the government’s furlough scheme due to end at the end of September, you might be looking for ways to manage your cash flow in the months ahead.
A business’ cash flow is the cash that flows in and out during a specific period of time. Cash inflow is when, for example, a business receives money from a purchase. On the other hand, cash outflow is when it pays its supplier invoices.
Cash flow is described as “positive” when the inflow of cash is greater than the outflow, and vice versa. To survive and be able to pay its bills, wages and operating costs, a business must always aim to maintain a positive cash flow.
Cash flow problems can cause huge roadblocks for businesses. That’s why good cash flow management is so important. Here are five things you can do as a small business owner to ensure you maintain a positive cash flow.
The first step is to assess the way you currently handle the cash flowing through your business. Consider everything -- from payroll to investments. Taking a shortsighted approach to cash flow management won’t cut it.
If we’ve learnt anything over the last 18 months, it’s to expect the unexpected.
By being proactive about your cash flow management, you’ll be better prepared for what’s to come and more able to plan your finances efficiently. You’ll also be in a stronger position to access business funding if you need to.
There are some practical things you can do to ensure positive cash flow, such as issuing invoices on time and using automation software to make it easier for your clients to pay you. This way, you’ll be able to focus on your business instead of chasing late payments.
Your cash flow forecast -- the document that helps you estimate the money flowing in and out of your company -- usually covers the next 12 months. But did you know you can also create cash flow forecasts for shorter periods, such as three months?
All small and medium sized business owners know that finances can change rapidly due to unforeseen circumstances. We’re not just talking about the pandemic -- losing a client (even if it’s through no fault of your own) can have a huge impact.
Be sure to build an accurate picture of the following:
Your stock and work-in-progress levels (how much cash is tied up in inventory?)
Your existing contractual agreements, e.g. repayment terms
Fluctuating staffing costs and how they impact your finances
How any new business models (e.g. online trading) are effecting your finances
As your company starts to grow, it may come across new challenges. You might need to buy more stock, move to a bigger premises or employ more staff. At this point, you may want to consider applying for additional business funding for growth.
Woman working in a local bookshop
Managing your cash flow effectively will make you more agile. You’ll be better equipped to leverage growth opportunities when they come your way, or adapt to changes in the market. You may be able to invest in more inventory, upgrade your equipment/machinery or extend supplier payment terms while maintaining healthy finances.
Why not give the ⅓ rule a go? Use a third of your cash for taxes, a third for dividends and keep a third in the business for any unforeseen expenses.
Cash flow finance can help companies manage their cash flow in the short term. The funds can be used for a variety of purposes, depending on the needs of the business. For instance, you might need to leverage cash flow finance to keep your business going during a seasonal dip, or to replace broken equipment.
Two common types of cash flow finance are trade finance and invoice finance.
Trade finance is designed for businesses that import or export goods, either internationally, nationally or both. It’s short-term finance that can be used by business owners who experience delays between selling goods and receiving payment.
Invoice finance helps business owners manage their cash flow by providing them with up to 85% of the value of their invoices immediately. The business receives the remaining amount (minus the lender’s fee) when the customer pays.
If you’re experiencing negative cash flow challenges due to the coronavirus pandemic, you might be eligible for finance through the Recovery Loan Scheme (RLS).
RLS finance can be used for any business purpose, including hiring new staff, boosting cash flow, buying more stock and investing in new equipment for growth. Up to £10 million is available and personal guarantee isn’t required for finance up to £250,000.
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