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SMEs and experts reveal the 10 steps that all businesses need to take to ensure they never run out of what many consider to be the lifeblood of a company: cash.
Last updated: 29 Feb 2020 6 min read
When a business is first starting out, it’s often the case that bills and expenses appear from places you couldn’t possibly have imagined – and these can seriously affect cash flow. Daniel Pitchford, co-founder of artificial intelligence content specialist AI Business, says it’s always sensible to look at your expected outgoings and add a safety net of 30% to 50%.
“Incidentals and costs that you couldn’t plan for will always come up – plus sometimes there will be opportunities for the business and you’ll need more cash to fund them,” he says.
One of the best things any business owner can do is to take a committed approach to cash-flow forecasting from day one, so that they have a regularly updated projection of the cash coming into and going out of the business over a specified period of time. “If you don’t have a real handle on it,” says Colin Hewitt, founder of Edinburgh-based cash-flow forecasting software company Float, “it can make life really difficult – you’re just operating in the dark.”
“Cash flow is the single biggest headache most SMEs face,” says Caroline Plumb, founder of cash-flow management software company Fluidly, “and more than a third of business owners worry about it.” The good news is that there are plenty of affordable tools on the market that make staying on top of cash flow much easier than it once was.
“From great accounting software to automated cash-flow forecasting and optimisation tools, it can all help businesses get paid faster while giving control, confidence and certainty around the business’s financial future,” she says.
“Bottlenecks in the time taken between providing goods or services and the time taken to receive payments can be tricky to navigate,” says Mathew Porter, MD of Kumo, a Nottingham-based digital marketing agency. “We had some real cash-flow issues as the business grew, because in some instances it would be almost 60 days before a payment was received for work that had been completed.”
If you understand how and why bottlenecks occur, you can make incoming payments work for you.
To avoid cash-flow shortfalls, the timing of when money comes in and goes out can sometimes be ‘handled’ to work in your favour. Pitchford says that delaying supplier payments towards the end of the payment terms, rather than as soon as they came in, and trying to get clients to pay up quickly meant his business didn’t need to turn to more drastic measures – specifically, borrowing money – to boost cash flow when starting out. “As new clients came in the key thing was to invoice as quickly as possible,” he says.
Porter adds: “One thing we did was to invoice all clients who had retention contracts on the first day of the month.”
Young businesses inexperienced with late-paying customers sometimes turn a blind eye to avoid having awkward conversations, but the ‘head in the sand’ approach is a bad idea. “You need to be able to understand at a glance how much money you’re owed that’s more than 30 days late and what you’re going to do about it,” says Hewitt. Once again, software can help – a tool named Chaser, for example, will automatically chase your debts, escalating the emails to make them more severe as time passes.
“As new clients came in the key thing was to invoice as quickly as possible”Daniel Pitchford, co-founder, AI Business
Hewitt says you should talk to your debtors, too. “But if the conversation only starts when payment is 60 days overdue you could be too late,” he warns. “In many cases, that business will be struggling – and they’ll be paying the loudest people first. If you’re quietly sitting in the background, then you’re the one that’s going to get left behind.”
It’s far better to avoid cash-flow emergencies, of course, but if and when they do strike, Colin Garvie, assistant professor of accounting and finance at Edinburgh Business School, says you need to weigh up your options. “Credit cards, directors’ loans and invoice factoring – where you sell outstanding invoices to a specialist company who release most of the value of the invoices to you immediately – all have benefits and some pitfalls. Do your homework upfront to avoid any surprises.”
When you can see a potential cash-flow shortfall, the temptation can be to rapidly cut costs, but if your product suffers, then Alan Barratt, co-founder of active nutrition brand Grenade, says you’ll have made a grave mistake. “If you’re going to cut costs, don’t damage your product,” he says. “You need to have an excellent product or service and if you cut costs that affect it you’ll do so at your peril.”
Possible areas to reduce costs that may not impact upon your product or service include energy-saving measures, reeling in travel expenses and so on.
Another way to make savings may be to negotiate better prices for the things you need to buy – but again, it’s vital that the quality of your product is not compromised. Equally important, says Barratt, is that you don’t dent your relationship with your suppliers. “Better to negotiate in a sensitive way, because everyone’s got to make money,” he says.
“If we do ever want to cut costs, we like to spread it across the chain so we’re not just affecting one supplier.” You don’t want to be that penny-pinching brand no one likes to work with because they never want to pay for anything, he says.
If you want extra cash, sell more of your stock. Often the easiest people to sell to are existing customers.
“Selling more to customers who already know and like you is one of the best ways to boost revenue and cash flow,” says Plumb. “Look for opportunities to cross-sell and upsell, from suggesting extra products they might want to consider to talking to them about their future plans and seeing how you might be able to help.”
Whenever you’ve done a good job, she says, it’s an ideal time to explore if there’s the opportunity for further business.
Leadership and Management