The essential guide to managing small business cash flow

The essential guide to managing small business cash flow 150 150 Cypher

The essential guide to managing small business cash flow

Earlier this year, as business owners struggled to come to terms with the impact of Lockdown 1.0, we hosted a webinar on this very topic. As the UK enters Lockdown 2.0 we wanted to revisit one of the most critical issues for small business owners: managing their cash flow.

As anyone who has started a company can attest, your cash position can be extremely tight as a start-up. Whether you have significant financial backing, are crowd-funding or using a redundancy package, you must make sure that your understanding of the company’s finances is second to none. If you don’t have a keen eye on expenditure and credit control and haven’t accounted for unexpected costs, you can surely expect your company to run out of money very fast.

Here are top five tips to ensuring your business maintains a healthy cash position:

  1. Bill on time- every time: This sounds so simple, but can catch so many new business owners out. If, after completing an agreed service or piece of work, you don’t send your invoice for a few weeks and then your client delays payment by a few days, the compound delay can be very damaging to your cash flow position, especially if you have fixed costs, and fixed payment dates of your own to hit. This lackadaisical approach to manual billing can also make keeping track of what is due in and going out harder.
  2. Automate your invoice system: Digital Accounting Software like Xero allows you to automate your invoice system. By using the Go Cardless plug in, your clients can sign up to a Direct Debit, which guarantees that they will pay on the same day each month. For transparency, at Cypher, we operate a monthly retainer model; all of our clients pay us a flat monthly fee and this gives them full access to the team, whenever they want. If you use Xero and connect your system up to Stripe, for example, then you can take payments from a card, via your phone instantly. This is something that a lot of our trade clients have found invaluable.
  3. Agree suitable payment terms: Agreeing enforcing your payment terms, in line with your other business costs will ensure you receive prompt payment and can cover your regular outgoings. Late payers can cause a great deal of distress to businesses of all sizes, but it is SMEs that can be hardest hit. Late payment adds a layer of uncertainty and can cause the kind of cash flow crisis that we could all do without. The first step is to determine the level of risk on payments you can take as a business. If the answer is ‘none at all’ then payment in advance is the solution. This can restrict your market somewhat, especially in the B2B world where companies often expect to pay on account, but many service-based businesses do bill for time ‘bought’ in advance.
    For some, billing in stages works best. But if you adopt this approach, i.e. 25% deposit or 50% in advance and 50% in completion, then you should ensure that your initial payments covers the costs of any outlay on materials or the cost of actually producing the project. Also, try not to leave too high an amount due for payment at the end of a job, it can be tricky to collect, possibly because clients see that as your profit element and were more blasé about paying. Try instead to recoup as much or your own expenditure as possible, in advance as this will improve your cash collection and cash flow immensely.
  4. Chase Bills before the payment date: If you don’t have a regular direct debit system in place and have agreed a suitable payment term, let’s say 30 days, then sending a client a reminder after say 25 days, suggesting payment is due the following week, while simultaneously thanking them for the work is a great way to ensure they pay on time.
  5. Use a cash flow forecast to plan effectively: A cash flow forecast is critical to give you the visibility of what’s coming so that you can plan. We always offer clients a detailed cash flow forecast and maintain it throughout the year. In general, it is really important to get someone who understands figures to keep an eye on cash and profit But if you are fundamentally scared of your bookkeeping practices then you should seriously consider outsourcing it immediately and let someone take care of it for you.

In a crisis, cash is king! Remember, no matter what your turnover is, if your cash flow is negative, then your business doesn’t stand a chance.

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