7 tips to manage your cash flow
In order to truly take the pulse of your business, it's essential you understand your working capital movements. It's a fundamental metric to measure the financial health and operational success of your business. But during the coronavirus pandemic, when the world changed from one day to the next, many business owners were faced with several cash flow challenges at once.
In this article, we offer you practical tips to get a handle on your working capital coming out of the pandemic. And to give you pointers how to make your business plans more resilient going forward.
Managing cash flow problems?
- Prepare a cash flow forecast and update it ideally monthly, or at the very least quarterly.
- Check what levels of stock you need to operate, while trying to minimise the amount of cash locked up in expensive stock.
- Regularly check on your suppliers standing, to avoid running out of supplies that would stop you from being able to operate.
- Consider renegotiating payment terms, or changing suppliers if you can get better terms that help you retain more cash in your business.
- Choose your funding and credit options carefully, to put in place fixed and variable arrangements that allow your business to scale up or down.
- Have a tight grip on all your outgoings and maintain a cash buffer in the business to see through difficult times, consider business insurance for areas where a cash buffer would be inappropriate.
- Last but not least, anticipate, anticipate problems before they happen by tracking worst-case and best-case scenario in your plans.
Avoid cash flow issues through forecasting
Cash flow problems can cripple any small business. With the record balance having almost doubled to £23.4 billion* at the start of 2020, late payments was the key concern driving four in ten (37%) small businesses to seek external funding. Then came the coronavirus pandemic, and the situation worsened almost overnight. Businesses worried about how to prevent late payments had to rapidly adapt to a situation in which sales significantly diminished or stopped completely.
Those business owners that managed to stay solvent during the crisis, on average, had a better handle on their business cash flow by way of a forecast. This doesn't need to be complex, but it means having clear sight of the money coming in or going out of your business, such as payroll, bills, purchases and investments. And to compare regularly what actually happened versus what you expected to happen. It's crucial to check this regularly, as most seasoned business owners know, there is always something you fail to expect!
Agree clear contract terms with customers and suppliers
Preparing a forecast for the first time can feel daunting. But even if you are used to doing it, separating your cash flow at a detailed level can be tricky. Because different parts of your business might be working to different priorities. For example, you may wish to reduce costs through consolidated shipments. But, at the same time, you don't want to lock up any more cash in stock than you need to.
One way around this conundrum is to define clear contract and payment terms with each customer before you take on work. And the same goes for your supplier relationships. Having clear expectations of that each party can deliver will help you take on business with the confidence that you can meet your obligations, while preventing complications around delivering to schedule and getting paid on time for when you need to settle with your suppliers.
Plan, plan, and plan again
You can better understand your business' position by planning your financial requirements as much as you can. Of course, you can't plan for everything, so do make sure you have some cash in reserve. While things are going well it may not seem necessary, but some cash tucked away for a rainy day is always useful. Try the simple 1/3 rule: one third for taxes, one third for dividends, and one third left in the business for unforeseen expenses.
There are various software packages on the market that come with forecasting tools. If you are not benefiting from any yet, then do look into your options. Once the data is in your preferred software package, you can make small tweaks to your cash flow predictions much more easily. It is also a great basis for considering when its time to renegotiate payment terms, benchmark suppliers or when you need to explore your funding options.
Be proactive, no matter what comes your way
A proactive attitude to business will ensure you plan efficiently and have good controls around your working capital requirements. Naturally, one size won't fit all, and therefore a scenario analysis is a practical way of testing if your existing working capital strategies are fit for purpose.
For example, if your supplier costs rise by 5% or your clients pay you 10 days too late, what is the impact on your financial position? Could you still pay staff and meet all your outgoings? Planning for those kind of contingencies may have seemed over the top in 2019, but post-covid your approach can no longer be ‘set and forget'. The financial situation of your business is always changing, and in much less predictable ways than ever.
Be flexible and keep an open mind
A solid financial plan can ensure your business stays as flexible as possible. This can give you a competitive advantage and gives you a fighting chance to preserve cash, which in turn can help improve access to funding, and reduce the cost of borrowing. Small businesses with little or insufficient working capital often struggle to attract investors or agree deals with lenders. But while you will be familiar with business loans, there is now a plethora of new funding opportunities, to bridge short term funding gaps, or invest in new products or services.
It is important for you to keep an open mind, and to explore all products available to you. Take invoice finance for example, which has improved a lot in recent years. Gone are the days when providers could attach lengthy contracts to such agreements, locking in your entire debtor book. There are now plenty of options where you can get advances starting with a single invoice.
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