Managing your cash flow is a crucial part of running a business. If your business lacks the cash to pay for wages, bills and rent, your business could ultimately fail.
Here, we explain what cash flow is and how to manage it to help set your business up for success.
What is cash flow?
Cash flow is simply a measurement of the amount of money you have coming into and going out of your business in a set period of time.
When you have a positive cash flow, you have more cash coming into your business than you have going out. This means you can pay suppliers, employees, taxes and rent on time.
But when your cash flow is negative, you have more cash going out of your business than you have coming in. And in this instance, it can make it difficult to cover bills and other expenses.
Keeping an eye on your cash flow is therefore critical if you want your business to grow.
Manage your cash flow in 5 easy steps
Below, we’ve outlined 5 easy steps to help you better manage your business’ cash flow.
Be proactive in your management
Where you can, it’s important to plan ahead. Make sure you know what’s on the horizon in the coming months and ensure you have the funds ready to meet your financial requirements. This will put you in a stronger position to get funding on your own terms and help you better understand your business’ financial health.
For money coming into your business, be sure to issue invoices on time as this will increase the chances of you being paid promptly. Using automated payment methods can make it easier for clients to pay you which means you spend less time chasing them.
Constantly update your cash flow forecast
It’s also crucial that you regularly update your cash flow forecast. Be sure to understand the amount of cash and working capital you need to run your business. Keep in mind that your business’ financial situation will constantly change so your forecast will need to change too. Correct any assumptions you made when first creating it.
Reassess, review and be realistic with your forecasting
Regularly assessing your business finances is a good habit to adopt. Pay attention to your profit and loss account so you can check you’ve made a decent profit over a set timeframe, and make sure sales and other income and your costs are all correct.
Being fully aware of what’s coming in and going out of your business will help you to adapt, whether that’s discussing terms with your suppliers, reviewing your staff numbers or reassessing costs.
Be flexible to changes
Flexibility is also important when it comes to cash flow. Being flexible means you can capitalise on growth opportunities and survive when the market unexpectedly shifts. It can also give you a competitive advantage – you might be able to change payment terms or update equipment without it having a negative impact on your business’s financial situation.
Additionally, it’s sensible to build a cash reserve – this provides a financial cushion to help you manage unexpected events, as well as take advantage of opportunities when they arise.
Consider cash flow finance
Cash flow finance is a form of short-term funding. It can help you take advantage of new opportunities and invest in new products and services, and it can help you to bridge short-term funding gaps.
Before applying for cash flow finance, it’s important to make sure you’re managing your cash effectively. Cash flow finance can be obtained quickly, but you will need to be able to demonstrate that you are an established business. You might need to provide accounts, trading records and evidence of a well-managed cash flow budget to secure your business loan.
A trade finance loan, for example, could help you to handle overseas transactions and costs if you have customers in the UK and abroad, and if you’re importing or exporting. Your supplier invoices the trade finance lender for the shipped goods, your customer then pays the trade finance lender, and then the lender pays you the profits minus fees.
Alternatively, invoice finance lets you borrow money against outstanding invoices. You can typically borrow up to 95% of the value of your unpaid invoices and the lender charges you a percentage of the amount of the invoice.
How to simplify your cash flow management
Keeping track of your cash flow means you need to keep up with your accounting and reporting on a regular basis. If you’re not great with numbers or you simply don’t feel you have the time to do this, consider hiring an accountant. You’ll also benefit from using quality accounting software which can help you better understand your cash position and forecast your cash flow for planning purposes. It will help you track and report on key business metrics, which can help you better manage your cash.
On top of this, it’s worth investing in decent invoicing software to help ensure your clients pay you on time. A lot of accounting software will also include an invoicing feature which can help you create and generate invoices on time and send reminders to clients so that you don’t have to keep chasing payment. Automated payment methods will also make it easier for your clients to pay.
Finally, make sure you keep your business and personal finances separate. This will make it much easier to understand your business cash flow and forecast how it might change.