Ten Tips for Better Cash Flow Management

By some margin, poor cash flow is the number one reason that businesses fail. Every year, over 50,000 UK businesses close their doors forever because of cash flow problems. No matter how good a company’s products and services may be, or how smart their marketing is, without strong liquidity, the chances of success are diminished.

Poor cash flow is defined as insufficient money coming in to meet expenses going out. It has little to do with profitability, and it’s a recurring problem for many thousands of businesses. The only way to beat the liquidity trap is strong cash flow management. But what does that mean and how does it work? Read on to discover more about good cash flow management and the best ways to improve the way money moves through your business.

What is cash flow management?

Cash flow management is the control of the cash coming into your business from sales and the cash going out to pay for expenses such as salaries, leases, rent, and suppliers. Good cash flow management will ensure that money coming in always outweighs money going out, creating a surplus cash balance that can be used for one-time costs, expansion, bonuses, or just reserved for a rainy day.

Why is it important for businesses?

Regardless of whether you’re a small business, or a large corporation with a turnover in the many millions, good cash flow management is important for all organisations. No business can foresee the future with 100% accuracy and customer markets are always changing. This means it is inevitable that all organisations will have lean operating periods. A healthy cash surplus can help the company ride out these low spots with minimal disruption, or it can create new opportunities in Mergers & Acquisitions (M&A), Research & Development (R&D), and market expansion. Failure to correctly manage business cash flow will usually condemn the organisation to a permanent game of catch-up, forever juggling accounts to pay expenses, and lacking the funds to capture lucrative opportunities when they appear.

Benefits of cash flow management

Cash flow management provides a 360-degree view of your business, allowing you to better control and expand all areas of your operation.

Key benefits of cash flow management include:

Ability to predict shortfalls

Surprises may be great for birthday parties, but they’re terrible for business. Your cash flow forecast paints a clear picture of your company’s liquidity, pinpointing the 'pinch points' where the cash balance will fall below the levels needed to pay the bills. Forewarned is forearmed. Seeing the shortfall before you get to it gives you time to adjust expenses, increase revenues with a sales promotion, or arrange short-term borrowing.

Supplier discounts

The cash surplus created by good cash flow management can do more than just sit in the bank. It can earn money too. Pay select suppliers early in exchange for an invoice discount.

Bulk ordering

Instead of buying raw materials and supplies on a ‘just in time’ basis and paying full price, purchase what you need in bulk at discounted or wholesale cost.

Company growth

As mentioned above, clear knowledge of your company’s cash position allows for the allocation of funds to the good things that spur real business growth – M&A, R&D, marketing, territory expansion, and new product introduction.

Peace of mind

It may seem obvious, but knowing you can pay the bills and keep the lights on without financial stress is probably the greatest benefit of good cash flow management.

Ten tips for better cash flow

Cash flow management is more than simply creating a spreadsheet, it means observing and controlling every aspect of the company’s finances:

1. Maintain records

The devil is in the detail, which is why it’s important that businesses keep accurate records, and then review them regularly. Total visibility is the only way to know what your true cash position is. The following is the minimum list of documents and data you should constantly review:

• Income statement – cash from operations and cash from financing
• Accounts Receivable
• Accounts Payable – including loans and credit card debt
• Recurring expenses
• Cash position – available cash and cash equivalents
• Inventory
• Individual revenue streams
• Cash flow statement
• Gross profit
• Net profit

2. Set and stick to a budget

Budgeting for expenses allows you to predict the peaks and troughs in your cash position. However, this only works if you stick to the budget. For safety, it is best to overestimate costs and underestimate revenues, but if you are still unsure of your expenses limit, set a contingency fund of 10% to absorb unexpected costs.

3. Regular spending reviews

It is very easy for growing businesses to lose track of mounting expenses – salaries, consultants, IT, travel, and energy, etc. Regular audits of expenses are the only way to get best value for money – especially in times of high inflation. Check your recurring costs. Are there cheaper ways to get what you need? Would your regular suppliers give a bigger discount if you paid them sooner?

4. Credit control

Slow collection of accounts receivables is the most common reason that cash flow problems persist. Keeping a firm grip on the credit you extend to customers is essential. Two key actions you must take to ensure your credit controls work properly include:

Clients – it is always difficult to turn business away, but vet your customers before you give them credit. Run a credit check on customers before you take them onto your books. Know who pays well, pays slowly, or fails to pay at all before you do business with them.

T&Cs – state your terms and conditions clearly at the start of the client relationship. Ensure your customers know when they must pay you, and what the penalties for not doing so will be.

5. Staff training

Your financial controls and processes are only as good as the people who administer them. Investments in IT and training for your finance staff will reap benefits, resulting in greater efficiency, lower back office costs, and improved business cash flow.

6. Expand your source of income

Businesses with one source of income are most vulnerable to market change and seasonal impact on revenues. Income from multiple and diverse sources, (such as brand spin-offs, new product lines, licensing, franchising, and partnerships), can reduce your financial risk and even out the bumps in your cash flow.

7. Invest in technology

The pace of technology development is still accelerating, and it is easy for businesses to get left behind, coping with obsolete software. Investment in app and cloud-based cash flow management systems that are constantly updated can improve your financial efficiency and remove the need for expensive and time-consuming upgrades.

8. Good business relationships

Maintaining good relationships with suppliers, lenders, and clients is essential for positive cash flow. Staying on good terms increases the likelihood of payments being made on time, or for flexible terms to be negotiated if they are ever required.

9. Spot the warning signs

It is never a case of ‘set it and forget it’ with client credit control. That customer who used to pay on time, but now pays less and less promptly, is a red flag. Don’t leave it until they can’t pay at all. Run regular credit checks on all who owe you money and adapt payment terms accordingly.

10. Don’t leave it too late, get help before it’s needed

If the worst happens and a looming gap in cash flow performance appears, take corrective action immediately. Leaving financial problems until the last minute typically makes them worse. Establishing short-term credit or securing investment cash takes time. Talk to your bank, accountants, and lenders as early as possible.

A cash-rich business is a healthy business

Cash is the lifeblood of any company, and good cash flow management is what keeps a business healthy. If you are looking at ways to streamline your international payments, talk to the experts at Clear Treasury. Our team of specialists can help guide you on the best FX tools to use to mitigate currency risk, ensuring your business stays firmly on track. Become a client today, call +44 (0)20 7151 4870 or email info@cleartreasury.co.uk.