Updated 24 August 2021
Business success isn’t just down to making big profits. You also need a healthy cash flow to keep operating smoothly and growing at pace. After all, without cash to hand, how can you grasp the next opportunity? Here are some tips to take the pressure off cash-strapped businesses.
Cash flow (or a lack of it) is one of the main reasons why young businesses fail. And it’s such a shame. Even some of the best business ideas can fall flat because there isn’t enough money to keep it going, let alone growing. The positive takeaway is that if this rings true, you’re not the only one. And help is out there to keep your cash flow buoyant, starting right here.
Difference between cash flow and profit
If you’re wondering why you can bring in money but still struggle to make ends meet, it’s because cash flow and profit are two different things. Profit is your revenue minus your costs, whereas cash flow is the money you have available at any one time. It can also include funds like investments and loans, as well as any of your own cash that you put into your business to keep it going.
There are a few types of cash flow:
Operating flow – this is the cash you need to keep your day-to-day operations running. It covers the costs of buying goods, paying staff, for the premises etc.
Investing flow – you might also want cash to pump back into your business to take it to its next stage. This could be to buy new equipment, expand your stock and take on or upskill new staff.
Financing flow – this kind of cash flow is all about debt, dividends and equity. It’s the cash you need to pay shareholders and pay off loans.
Why do businesses have cash flow problems?
Cash flow is a complex maze to navigate. You may be waiting on payments from clients, having to buy stock in advance or face unexpected costs. If your business is seasonal, you might find yourself scraping by at certain times of the year with no cash coming in. And if you’re trying to grow your business, you’ll need to make investments, which will put pressure on your cash reserves. Or your business might simply be expensive to run, perhaps because your lease is high, or you need specialist equipment that has drained your cash.
These cash flow problems may feel out of your control, and unexpected costs are often unavoidable. But there are some steps you can put in place to help protect the precious resource that is cash.
10 tips to improve your cash flow
Keeping your cash flow healthy is a constant mission. These tips are common ways that businesses save money, make money and keep payments coming in on time.
1. Cost your services properly
When you first start out, it’s tempting to under price yourself to bring in more business. Whether you’re underestimating your expertise or the value of your products, or you’re simply trying to lure in customers, low prices can have the opposite effect and harm your cash flow in both the short and long term. It’s also difficult to increase prices significantly when you start at a low level.
Do market research and price yourself competitively. If customers or clients do quibble the price, be ready with reasons why you are different from your competitors. Or leave wiggle room in your quoted price to come down without injuring your margins.
2. Offer easy ways to pay
When your aim is to collect money, it doesn’t help if there are payment barriers in place. Offer flexible payment options by accepting cards, bank transfers, PayPal, Direct Debits and cash (if appropriate for your business). You should also make your payment details easy to find. Make sure customers are clear on your prices before you hit them with a bill they don’t expect. And if you send clients invoices, include the bank details so they’re easy to find.
3. Do your research before you agree to work
No start up wants to turn down business. But what’s the point in spending time and effort on work that you never get paid for? It can be difficult to know whether a client is or isn’t likely to pay, but a little research can go a long way. If it’s a business, look it up on Companies House to make sure it’s legit and its finances are in order. An accountant can help you do this digging to make sure you’re not getting involved with a business that’s facing its own cash flow problems.
4. If in doubt, ask for a deposit
People and businesses that are happy to pay are usually happy to put down a deposit too. You could request 25% or 50% upfront, or ask them to cover the cost of any materials upfront. Not only will this ensure you have enough cash to cover immediate outgoings, but it can also help to protect your cash flow should they default later down the line.
5. Stick to your payment terms
When agreeing work with clients, you should always agree payment terms first with a written up contract. Without this, it’s much more difficult to chase payments, and you’d hit a wall if you decided to take legal action without hard evidence.
Include details on when you’ll invoice them and expect payment, ways they can pay, who you’ll contact for payment and who they should contact with any queries. With clear payment terms in place, no one can pretend they weren’t sure about the payment.
Just remember to stick to your end of the bargain, otherwise they might not stick to theirs.
6. Monitor, chase and ban
Lots of businesses have online systems to help with keeping track of invoices and payments coming in. They’re a good way to know where you stand with cash, and they can save you time in looking through spreadsheets trying to find one missed payment.
Ideally, you should be checking this daily, so that you can quickly start to chase a payment when it’s overdue. Keeping an eye on late payments will also help you spot clients who are regularly paying late or not at all. You might want to consider banning them from your books if they’re causing a headache.
7. Focus on building relationships
You might feel awkward chasing payments, but if you have a good rapport with the client, it should be much easier. Not only can you drop the payment into conversation, but they’re also less likely to default if they value your relationship. Try to keep in regular contact, focus on quality and value, and act on your promises.
8. Keep an inventory
Unused stock could also start draining your cash, especially if you’re ordering in fresh produce that you end up having to throw away. Knowing how much to order takes experience, but it starts with keeping note of the amount you regularly order and use. Tracking this information through an inventory will help you quickly spot when stock is going to waste, enabling you to cut down on unnecessary expenses.
9. Don’t pay straight away
No one loves debt, but it’s something business owners have to get comfortable with. If you pay invoices straight away, you might find yourself getting rid of the vital cash you really need. Holding onto it until other payments come in can really help you keep the cash flowing nicely.
BUT that doesn’t mean you can constantly make payments late. Make sure you stay within the payment terms to avoid burning vital bridges you need to succeed.
10. Get a professional involved
The tips above are about putting essential cash flow measures in place, but you should never be afraid to ask for help too. Lots of businesses, big and small, have accountants to take care of all, or lots, of these steps. Because when you run a business, your mind can’t always be on the cash alone.
By getting a good accountant on board, they’ll create regular cash flow forecasts to help you plan better. They can highlight ways you can make savings, whether that’s slashing your energy bills or finding a cheaper supplier. And they can chase payments for you, meaning you don’t have to worry about sending those awkward emails.
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