How to Avoid Cash Flow Problems

Cash flow is often referred to as the lifeblood of a small business, yet many still struggle with cash flow issues. Ensuring you have a healthy flow of cash in and out of your business is key to being able to pay your costs, invest in your business and adapt to changing circumstances, so what steps can you take to avoid cash flow concerns?

What is cash flow management? 

To ensure a healthy cash flow, the key is to manage the money coming in and going out of your business, with the overall aim of having more money coming in than going out. To do this, you need to record all payments, bank statements and bills, as well as record all money going out, such as purchases and payroll.

Monitoring your cash flow will give you a complete picture of your costs and revenue and ensure you have enough funds available to pay your bills while also making a profit. It will also ensure that if potential issues are festering, you’ll be able to identify them at an earlier stage and hopefully take steps to rectify the situation.

Why is managing cash flow necessary for small businesses? 

Small businesses can be particularly susceptible to fluctuations in cash flow as they’re unlikely to be sitting on the cash reserves of major corporations, making it more of a challenge to respond to unexpected changes or ride out challenging times. Good cash flow management is about more than simply surviving; it can also impact business relationships, growth opportunities and even customer satisfaction.

For example, if you get to the point where your outgoings exceed your income, you will have to start making tough decisions about who gets paid on time. Late payments to suppliers will inevitably lead to strained relationships and could negatively affect the terms of your deal, perhaps leading to higher costs in the future. 

Limited cash flow will also mean less investment in your business. Whether that’s a reduction in promotion and marketing activity, having to turn down investment opportunities or missing out on the efficiencies that come from upgrading and maintaining equipment, all of these can affect business growth and development.

It’s also worth noting the negative impact on employee morale if they’re working in a company stagnating and struggling to meet its financial responsibilities. Such uncertainty and negativity can lead to people looking for work elsewhere, leaving you under-resourced and spending time and money recruiting new team members.

Of course, a sudden shock, such as a client going out of business or a massive bill increase, can cause problems even with a comprehensive cash flow management system. In this situation, ensuring your finances are as robust as possible will be critical, particularly if you need to secure loans or finance to see you through the tricky times.

Signs of cash flow problems 

So how do you spot the signs that you’re entering a cash flow crisis? Top of the list would be keeping an eye out for high accounts receivable with an increased number of unpaid invoices. A low volume of orders compared with your inventory could also be a sign of trouble, as could declining sales. Also, keep an eye on cash flow if you’re going through a period of growth; rapid growth can lead to more demands for cash, putting a strain on your reserves.

How to manage your cash flow effectively 

Fortunately, you can take several steps to ensure you’re managing your cash flow and responding effectively to any signs of trouble.

1. Focus on incoming payments

Keeping on top of payments is key to effective cash flow management. Accounting software can help with automated invoicing and payment reminders, preventing bad admin from affecting your cash flow. Also, ensure your clients are clear on their payment terms – you could even offer discounts for those who settle their invoices quickly. And don’t be afraid to enforce late payment penalties.

2. Reduce unnecessary expenditure. 

Even if you have a healthy amount of money coming in, your cash flow can still suffer if you’re not keeping your spending under control, so be sure to review your outgoings regularly. While some overheads will be fixed, others are negotiable so see if you can agree better rates with suppliers, look for cheaper options for business travel and accommodation, and look for more efficient ways to carry out marketing and promotion. Always track every expense, too, as there may be opportunities to cut spending that you hadn’t previously thought of.

3. Generate more revenue

While likely to be easier said than done – and unlikely to be a short-term solution - it’s also worth looking at ways to up your revenue. This could include offering promotions, looking at your pricing, or seeing if there are new opportunities – such as expanding into new markets – that could work for you.

4. Manage your inventory

If you’re a company with high stock levels, revisiting your inventory plan will be essential to maintaining good cash flow. Unsold stock suggests a sales plan that doesn’t match the current reality of the market, so analyse where your stock levels should be and reduce them accordingly. 

5. Be smart with credit

Turning to credit can be daunting for a small business as the last thing you need is another bill you might struggle to pay. If you’re clear on your cash flow situation, turning to a lender for help can be a sensible idea. For example, if you’re waiting on a reliable client to settle a large invoice, you can be pretty sure you’ll be able to pay off the debt in good time, so using a loan to see you through a short-term cash flow shortage can make sense. Similarly, if you’re investing in business growth, a loan can help to get you where you want to be – again, just be sure the finances make sense, and you’ll be able to pay it back. 

6. Speak to the experts

Finally, it’s important to remember that if you do sense trouble ahead, you’re not alone. Speak to your bank, your accountant, or your financial adviser, as they will all be able to suggest steps you can take and offer support to get your business back on track.