According to UK research, 37% of small business owners have considered shutting down their business due to late payment problems. Such problems arise due to a need for cash flow management and financial literacy.
Let’s uncover why your SME and entrepreneur journey needs proper cash flow management to keep it running and how you can achieve it.
What are the steps you would consider in preparing a simple cash flow for an SME?
Here are some tips:
1. Understand Your Cash Flow
There are two components of a cash flow – inflows and outflows. The received cash is the inflow, and the money spent represents the outflow. The resulting net cash and equivalents transferred to and from the company represent cash flow. It’s different from profit, which indicates the assets left after expenditure, whereas cash flow concentrates on solely the availability of cash. Recurring cash flow analysis helps identify the best business routines, predict future financial requirements, and avoid trading issues in SME businesses.
2. Create a Cash Flow Forecast
To predict your future financial checklist, you need to create a cash flow forecast/projection. It will help you identify potential problems, keep your suppliers and employees happy, and reduce cash shortages. Let’s say your company makes £500 in sales this month and has terms of one month. Though the profit looks good on paper, you will not receive cash until next month. If you purchased the stock you sold last month, suppliers will want paying this month when you have yet to receive the cash.
Managing your expenses for this month would be easier if you already have enough cash reserves to settle the expenditure. If there’s a decline in revenue for a month or two, your company will show a negative cash flow. Hence, predicting this from the beginning via cash flow forecast is an excellent way to avoid issues. We suggest hiring accounting services, as they use relevant methods tailored to your company cash flow.
3. Manage Receivables Efficiently
If you do not know where your money goes or went, things will become chaotic for your small business. Hence, efficient receivables management is necessary for maintaining positive cash flow. Start by:
- Invoicing promptly
- Set clear payment terms. The most common UK payment terms are net 10, 30, and 60. Net 10 means that invoices are to be paid within ten days, and so on.
- Offer early payment discounts.
- Send regular payment reminders.
- Monitor outstanding invoices and follow up on overdue payments.
4. Control Your Expenses
Healthy cash flow is all dependent upon controlling expenses.
Begin by:
- Recognizing and organizing all expenses to understand where your money is going.
- Eliminating unnecessary costs, such as subscriptions no longer needed.
- Negotiating well with suppliers (discounts for bulk purchases or early payments).
- Utilizing cost-saving technologies, like automation or energy-efficient equipment and tools
5. Build a Cash Reserve
A cash reserve is a financial safety net for businesses, helping it to recover from unexpected expenses or low revenue periods. To determine the appropriate cash reserve size:
- Consider your business’s variable and fixed costs
- Next, set a reserve high enough to cover at least three to six months of expenses.
- Avoid unnecessary withdrawals from the reserves.
- Set aside a portion of profits regularly.
6. Utilize Financing Options Wisely
For UK companies, various financing options are available, including lines of credit, government grants, invoice financing, etc..
Each option has its own pros and cons, so choose the one (or a combination) that best fits your business needs.
7. Monitor and Adjust Regularly
Keep track of your cash flow by monitoring it regularly using accounting software to track real-time movements. Review them monthly and adjust your strategies to aligning them with your business performance. Address cash flow issues by taking proactive steps like reducing unnecessary spending and changing payment terms.
Wrap Up
Efficient cash flow management is not just a good practice for all entrepreneurs and company owners, it’s a core requirement. With a well managed cash flow, your business can consistently strive towards and achieve its goals.