Top tips to improve and manage your cash flow

Turnover is vanity, profit is sanity, but cash is king!’  This is the saying and business owners understand this now only too well given the events of the last few years.  Businesses continue to feel the pressures of economic challenges, rising costs, as well as changing markets and consumer behaviour.  All of these can have significant impact on cash flow.  However, there are some general guidelines to follow to ensure your cash flow position remains as strong as possible: 

• Be strict with invoicing – it is vital that as soon as the product/service has been provided that you are disciplined in raising your invoices and ensure these go directly to the most appropriate person to approve and pay. The quicker you invoice the quicker this can be turned into cash!
• Collect the cash – it sounds simple but can be more difficult than anticipated. Make sure you have built a strong relationship with the key people at the customer. Hopefully, this results in the invoice being paid quickly and on time.  However, a discussion over status and any issues over payment is better than a radio silence and means the business can at least factor that information into any projections. Perhaps also consider incentives to customers such as early settlement discounts or look at financing means such as invoice finance to stimulate cash flow.  Also consider forms of credit insurance to mitigate credit risk.
• Be firm – it is important to be firm on credit terms and credit limits, and if your T&C’s stipulate interest on late payment then ensure you enforce it to prevent repeat offenders.
• Be lean – depending on the industry it is typically best to be as lean as possible to minimise cash tied up in stock.  This has proven challenging in recent years with long lead times on materials.  It is still important to maintain good practice and ensure that stock is not held for any longer than necessary. This storage can also be costly and so it may be worth exploring stock being held on consignment for example or looking at how you can boost your supply chain.
• Review your payment terms – cash is important to all businesses, but it is always worth negotiating with key suppliers to extend terms where possible. This maintains the cash in the business for longer. However, this must be assessed against the commercial benefits of supplier goodwill, and any possible early settlement discounts currently available.
• Reliable and up-to-date financials – no business can fully understand its position if it doesn’t have the information at hand to be able to make good quality decisions, particularly around cash flow. You can’t assess your status if you do not have a reliable and up to date position.
• You are not your business – it is important to ensure that the business and your personal finances are kept distinct with separate accounts used for each. Things can get tricky where the lines are blurred and it can mean you never have a clear position over cash flow, as well as costs not being assigned correctly in the first place which can have expensive tax implications also.
• Manage your cash reserves – having a cash reserve gives you some comfort and peace of mind that you can access cash at short notice if an emergency occurred and helps to alleviate the sleepless nights. The amount will depend on the business and level of trade as well as the general approach to risk. However, the Pandemic has shown that a cash reserve is vital and was particularly helpful in the interim period between the lockdowns and subsequent financial support announced by the government.
• Claim for everything! – make sure you have taken full advantage of any monies available to you and your business for which you are eligible. Ensure you speak to your accountant or local authority to see what grants are available and reliefs, as well as the various tax schemes and reliefs that are available.
• Understand your cash flows – seasonality can cause large fluctuations in trade and hence cash flow within a business – no doubt we’ll all be eating lots of ice creams on our Summer holidays but perhaps not so much in the middle of Winter!  It is important to look at how the cash flows are impacted throughout the year and see where you can diversify your offering in the quieter months or look at where additional funding requirements or reserves are needed at critical points in the year.
• Put any surplus cash to work – if you’re in the position of having excess cash in the bank, this can also represent a large opportunity cost to the business.  Think about where you can invest this cash to drive the business forward or remunerate key staff.  Escalating interest rates also presents an opportunity and so ensure this cash continues to work for you by looking at appropriate bank accounts to naturally mitigate against rising costs elsewhere.

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