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cash flow management
6 min read

A beginners guide to cash flow management

Turnover is vanity, profit is sanity, but cash is reality. Doesn’t matter how many sales you make or how much profit margin you add, if you can’t access enough cash to pay your business debts when required, pretty soon it will be game over. Even otherwise successful businesses have found this out to their cost, because cash is and always will be king. Keeping your cash flow healthy is vital to your small business’s survival and future success, which is why cash flow management must be one of your key priorities. So, how do you keep your cash flow healthy?

The benefits of sound cash flow management

Cash is the lifeblood of all businesses. You can’t operate without it. “Cash” doesn’t mean physical banknotes and coins; it means money that you can use to buy things your business needs and pay your business debts when required, because it’s a “liquid asset”, not money tied up in “fixed assets” such as premises, equipment or a vehicle.

Keeping your cash flow healthy should always be a key priority. For many, it can be a huge challenge that requires lots of effort and determination, while many small-business owners aren’t brilliant at cash flow management, often because they lack knowledge and experience. But over time, you can get better at managing your cash flow.

If you keep your cash flow healthy, it can help you to grow your business. It also makes your life much easier by saving you much time and hassle, freeing you up to add more value to your business and spend your time doing more enjoyable and rewarding things.

What’s the difference between profit and cash flow?

Sometimes profit and cash flow are confused, but they mean very different things. Basically, profit is how much is left after you take away your costs from your business income or selling price. The term “cash flow” describes the relationship between cash entering and leaving your business.

  • Your cash flow is positive when there’s a cash surplus within your business (ie cash is readily available to you).
  • Your cash flow is negative if your business costs are more than its income (ie there is a lack of available cash).
  • When businesses run out of cash they experience a “cash flow crisis”, which can be minor or major. The ongoing challenge is to avoid cash flow crises.

Key cash flow management tasks for small-business owners

There are six key tasks you need to take care if you want to keep your cash flow healthy:

  • cash flow management
    Limit your costs

    Never allow your monthly business outgoings to be higher than its income. The less you spend, the healthier your cash flow. Set specific budgets in key areas and stick to them. Don’t waste money buying things your business doesn’t need. If your business does need something, negotiate firmly to try to get best-possible value from all suppliers. Assess your business costs every month and try to find savings where possible.

  • cash flow management
    Maximise your margins

    Your prices must be set at a level that maximises your profit without putting off customers because they’re too high. Good knowledge of your customers and competitor prices is essential when setting your own prices. Many business owners are hesitant to increase their prices, because they fear losing customers. However, your profitability and cash flow will suffer if your costs increase and you don’t put up your prices.    

  • Negotiate favourable credit terms

    The more credit you can get from your suppliers and the more time you’re given to pay them, the better for your cash flow. You must be a firm but fair negotiator; you need to build up strong supplier relationships. Carefully consider the cash flow implications if a supplier asks you to spend more to get more credit. It may not be worthwhile.  

  • Don’t give away too much credit

    Your customers will, of course, try to get as much credit as possible and more time to pay you, but both can have serious cash flow implications. Where possible, avoid granting credit to new customers until your relationship is better established. For higher-value sales and longer-term contracts, getting a part payment upfront or agreeing staged payments can ease your cash flow pressures.

  • cash flow management
    Send your invoices ASAP

    Sending invoices out late is a key cause of small business cash flow problems. However, the longer you take to send your invoices to your customers the greater the pressure on your cash flow. As soon as your product/service is supplied/delivered to your customer – issue your invoice. If affordable, offering a small discount for prompt or early payment can be good for your cash flow.

  • cash flow management
    Chase up late payments as soon as overdue

    It can be difficult when so many things compete for your time and it’s something you may hate doing, however, the longer you leave chasing up late payments, the worse it will be for your cash flow. Shortly before an invoice is due, email a polite reminder to your customer. If you’re not paid on the due date, email another reminder. If there’s no response, call them up to politely request immediate payment. Be tactful, because they could be waiting for payment from their customers.

Dealing with cash flow problems: FAQs

  • What if my business experiences occasional cash flow problems?

    Cash flow problems are reasonably common in business. As long as they don’t happen to you too frequently and they’re not too serious, your business should be OK, although you need to understand why they happened and take steps to prevent them happening again, where possible. Sometimes they happen for reasons beyond your control (eg inflation or a regular customer goes bust).

  • What if my business often experiences cash flow problems?

    Regular cash flow problems are a sign that you need to make fundamental changes to get your business on a better financial footing. The solution could be to cut your costs further or boost your income by finding new customers (or possibly diversify or pivot your business). If you just bury your head in the sand, one day soon your business might run out of luck because it can’t weather the storm. 

  • How can cash flow forecasts help?

    Producing reliable cash flow forecasts, based on predictions of your likely sales and costs for the next 12 months, can enable you to look ahead and spot times when your business risks running out of cash. If so, hopefully, you can act now to avoid a serious cash flow problem, for example, by arranging funding to get you through a short-term cash flow blip.

  • Who can help me with my business cash flow problems?

    An experienced small-business accountant will be able to provide you with useful advice on cost control and other financial aspects of managing cash flow. A marketing consultant may be able to advise you on how to grow your sales, but, obviously, you need to pay for such advice. If money is tight, seek free online sources of reliable cash flow and marketing advice.

  • What if I just ignore my cash flow problems?

    If your small business experiences serious cash flow problems regularly, do something about it – while you still can. Simply ignoring the problem in the hope it will go away isn’t recommended, because you must address the root causes of your cash flow issues. Ignoring problems can soon lead to disaster.

Could invoice finance provide a cash flow solution?

If you grant credit to your customers, invoice finance could make late payment much less of an issue for you, because it enables you to quickly raise cash against the value of unpaid invoices. Typically, you get up to 90% of the unpaid invoice’s value straight away from a lender; you get the rest – minus the lender’s fee – when your customer pays the invoice. There are two types of invoice finance.

Invoice discounting

Your customers won’t know you’re using invoice finance, because you’ll still be the one contacting them to collect payment, the lender doesn’t get involved.

Find out more

This can be a good choice if you don’t want someone else to contact your customers…

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Invoice factoring

The lender collects payment from your customers directly, which can save you time and effort. 

Find out more

This can be a good choice if your customers won’t care who contacts them about unpaid invoices…

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