Leadership and Management

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How to stay on top of your cash flow

Managing the delicate balance between sales, creditors, debtors and overheads is as important as ever for many small businesses. Here, the experts at Rapid Cash provide an overview of the different working capital experiences entrepreneurs might face.

Last updated: 16 Oct 2020 4 min read

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How could a rapid rise in customer demand affect the cash flow of a small business?

While growth is often seen as a positive indicator of a business’s performance, the rate at which the business grows can lead to a common problem – overtrading. While the turnover grows, so does its operational costs and overheads, so it is important that a growing business has the right cash-flow tools in place to manage a sharp rise in sales. Ensure your chosen solution helps the business as you expand by offering flexible limits to grow in line with sales.

How could a business save costs if customer demand suddenly falls?

If demand suddenly falls, a business must ensure that it controls its fixed overheads. Variable costs will generally be easier to control if sales decline, but ensuring the company has sufficient provisions in place to manage costs such as rent, rates and wages is vital. The same also applies to its bank facilities. If you have a funding solution that has a monthly fee or arrangement fee attached, and you are less reliant on using this solution, it can be very costly. Check whether your provider charges an arrangement fee or a monthly service charge. If demand falls and use of the facility also falls, you don’t want to be paying a monthly service charge.

How could a small business release cash to pivot to a new model or service?

When a business pivots its production or sales into a new production line or market, this will often have an impact on the profit margins due to unforeseen costs of sale. To enable a business to pivot, it is therefore important that it has a provision of cash set aside to cover those unforeseen costs. Where this is not possible, the business can look at raising cash from its assets to create that much-needed provision. This can be achieved either through refinancing fixed assets (machinery and equipment), or releasing cash from the debtor book to bring forward the payments it is due.

To enable a business to pivot, it is important that it has a provision of cash set aside to cover those unforeseen costs. Where this is not possible, the business can look at raising cash from its assets to create that provision

How could an internal cash-flow forecast help businesses during uncertain times like these?

A cash-flow forecast is a great tool for a business to predict where its cash-flow gaps are, and enable it to identify an appropriate solution that covers the deficit. A business should carefully map out the predicted sales and outgoings, as well as money due to be paid in on a monthly basis.

It is important to take into consideration the payment terms offered on sales, as a sale created in January may not be due for payment until March (on 60-day payment terms). This could create a cash gap of 60 days that needs bridging.

There are ways of reducing the cash deficit, for example by renegotiating payment terms with a customer to get cash in sooner, or even negotiate better payment terms with suppliers. Also consider how much stock is being purchased and question whether it can turn stock over into sales sooner. The cash flow will tell a business what level of overdraft, invoice finance or other working capital facility it will need to set up to cover the cash-flow deficit.

How does understanding customer-buying patterns help with planning?

It will be fairly easy to identify the buying patterns for existing customers. The simplest way of doing this is by looking at a historical cash flow that breaks down the sales by each individual customer. This will tell you which customers are seasonal and which are more consistent with their purchasing. For new customers, it is always worth asking if they expect any seasonality in their orders. This will help the business prepare for busy periods, and will often help in the negotiation process of agreeing payment terms.

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Leadership and Management