What is cashflow?
Being able to manage your cashflow is vital for any healthy and successful business.
Cashflow refers to the movement of money into and out of a business, representing the cash generated and used during a specific period. As a business owner, you want to make sure that the money going into your business is more than the money coming out, so it’s important that you stay on top of it!
However, during hard economic periods, it isn’t always easy, with many SMEs facing increasing pressures on their cashflow. Three of the biggest reasons you might be facing cashflow problems are late payments, rising costs and seasonal slowdowns.
In 2022, Xero and Accenture’s research revealed that late payments cost UK small businesses an estimated £684 million a year. You’ll need to avoid this if you want to keep your business stable.
So, here are a few tips from us if you need some help improving that all important cashflow…
Cashflow forecast
Being able to analyse and stay on top of your cashflow, with up-to-date info, is extremely important when trying to improve it.
There are several options to help you automate your cashflow analysis, including moving to a cloud accounting platform. Cloud-based accounting systems are one of the best ways to improve your cashflow, ensuring your cashflow forecasts are based on real-time data. Also, it will allow you to connect anywhere in the world 24/7, so nothing can get in the way of you and your cashflow!
Improving your invoicing and collection processes
Make sure that you are invoicing promptly, as well as setting payment terms for customers, as quickly as possible (should be within 15 days). It is also a good idea to get full or partial payments upfront when possible. Accounting software can be really useful to not only track payments, but to send automatic reminders too.
Revising your payments process could be the best place to start. Want to receive stress-free on-time payments? Consider using Direct Debit, where you have complete control of the payment process. It is not only more convenient for you, but your customers, as they won’t need to update any of their card details. Also, your customer only needs to give authorisation once, for you to be able to collect both one-off and recurring payments. Direct Debit even helps with your invoices, allowing you to issue invoices at different times and different amounts.
Another idea we suggest is to charge a deposit, a common business practice that can help make sure you are securing a portion of the payment upfront. It not only will give your business a source of immediate funds, but it is a good insurance if a deal falls through and reduces the risk of late or non-payment.
Why not try to encourage customers to pay early by offering discounts for prompt payments? This can help to provide an incentive for clients to settle their invoices sooner, which will improve your cash flow.
You could also send proactive reminders or simply negotiate better payment terms with your clients, although you’ll need to warn your customers before changing anything. But remember, using Direct Debit to collect payments eliminates late payments altogether!
Building reserves and avoiding your own personal money pot
To protect your cashflow, and to maintain a peaceful mind, it is useful to have a cash buffer by building reserves before investing in growth projects. That extra cash will be ready whenever you need it, whether to improve a bad month of cashflow or to help with other business transactions and opportunities.
However, avoid using any of your personal money, as without even realising, you could be risking your own financial future. Make sure, if you haven’t already, to set up a Limited company. With a Limited Company, you’re no longer personally liable for any of its losses or debts, keeping you protected.
You can avoid this by exploring funding methods, such as paying bigger bills in monthly instalments or negotiating extended credit terms with suppliers.
There are also more simple borrowing solutions, such as business overdrafts or invoice factoring, so there are lots of options to take before dipping into your own funds.
Remember: Expanding sales doesn’t equal profit
While expanding sales is a positive step for a business, it doesn’t guarantee increased profitability. Profitability is determined by the relationship between revenue and costs, and a business can face challenges if the costs associated with increased sales outweigh the revenue created. Don’t take your eye off the ball, plan for these expenses and any upcoming tax payments!
It is important to handle any cashflow problems to keep your business on the right track. If you want more information on how to manage your cashflow, contact us today to stay one step ahead of any cashflow worries you might have.
