Guide

4 mins read

Cash Flow Guide

We all know that cash keeps your business alive.

In essence, cash flow is the flow of money (cash) in and out of the businesses, and managing cash flow can be a problem for many small and growing businesses.

According to research in August 2017 by Business Insider UK, 82% of businesses fail due to cash flow problems.

Cash flow can be the difference between survival and failure; we need to embrace process refinements that can help you manage your cash flow effectively.

We put this guide together to help prevent the pitfalls many businesses find themselves in.

This is just a guide, and we recommend that you speak to a member of the FC team who can help.

Be organised

For a small or growing company, managing cash flow can be something that gets overlooked. The focus in any business is always on finding and retaining customers, providing good service, and developing new products.

Yet, companies are more likely to go out of business simply because they run out of cash than for other reasons.

Cashflow forecasts can be an invaluable asset to stop you from getting into trouble. Done properly, they will alert you to take action if trouble is on the horizon.

Time spent planning allows you to ask your business the right questions to avoid unnecessary costs and charge the right price.

Be Professional

If you deliver in a timely way and appear professional and organised, you’re more likely to be paid in full and on time. Don’t give your customers an excuse not to pay; give your business a head start by sending invoices promptly.

“Late invoicing suggests to the supplier that you won’t mind late payment.”

Efficiency is key

It’s important to manage stock and inventory effectively. Don’t overstock because it eats up cash, but equally try not to run out of stock which could lead to missing out on sales and profit.

If you have large capital payments to make, or if your day-to-day costs are expensive, especially when starting the business, try to finance the company without putting pressure on cash flow.

Ask whether you can lease equipment rather than buy it. Especially at the start, capital costs can sink a company. It may cost more in the long term to leasing, but protecting your cash flow early on makes can make this a good investment option.

Have a contingency plan

Don’t invest everything you have in the business and consider spreading payments.

It’s a good idea to know where you can turn quickly for fast cash, should you need it.

Ensure you have an overdraft in place for emergencies – you don’t have to use it, but having one will afford you peace of mind. We can help you with all funding options available to you.

Building a cash buffer will help prevent your business getting caught out by wider issues that you can’t control.

Consider Factoring insurance – factoring Insurance is an agreement with a third-party company to purchase accounts receivables at a reduced amount of the face value of the invoices.

Some factoring services will assume the risk of non-payment of the invoices they purchase, while others do not.

Factoring

Factoring or invoice discounting is a popular and relevant consideration at times. Invoice funding is ideal for businesses that have customers on long payment terms or who often pay late.

Each can create a cash flow gap when paying staff and suppliers while waiting for invoices to be paid.

It can also help businesses who want to take on new projects without taking on extra debt.

With a Factoring solution, you benefit from funding and credit control. With Invoice Discounting, you benefit from the funding that a funder can provide whilst still maintaining credit control.

Here are the options available to you…

  • Factoring
  • Invoice discounting
  • Forward Finance
  • Construction Finance
  • Export Finance
  • Recruitment Finance

Managing Late Payments

Late payments are a tough problem for small firms to deal with, yet many companies won’t chase bad debts because they fear it will harm customer relationships.

There are practical steps you can take to stay in control:

  • Ensure your payment terms are clear – ambiguous payment terms are likely to lead to delay
  • Emphasise politely but firmly legal requirements to meet terms.

Check for creditworthiness

It is also important to check that customers are creditworthy. If you accept large orders from individual clients, take steps to reassure yourself that they will pay.

Refuse so-called “back-to-back” payments. This is where you get paid when the customer gets paid. It can cause your business problems further down the line.

If cash flow is an issue for you, a top tip could be an effective strategy. It’s worth considering placing incentives on swift payments. Even a small discount of 0.5% on large orders might encourage prompt payment.

Free up cash reserves

As well as standard loans, other options might suit your business. Asset finance spreads the cost of capital investments, while invoice finance helps release cash from unpaid invoices.

If your business is suffering from lots of late payments, invoice finance could speed the process of getting cash to your account. Trade finance can be used when you need to make capital purchases, but the seller won’t offer terms.

However, you finance your business; it is important to have backup plans in place. Small businesses rely on cash liquidity, and an unexpected payment can quickly drain your business of resources.

Once you’ve built up a cash reserve, keep a proportion of it in an emergency fund.

Did you know we offer a cash flow forecasting service? Get in touch

Check out more information from Patrick our VFD in this
video

See also

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