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Updated: 11 February 2022
It’s an old business adage that cash flow is king. Healthy cash flow ensures suppliers and staff are paid, contracts are delivered, stock is replenished and profits are earned. However, poor understanding and management of cash flow contributes to 82% of business failures, so here’s our tips to help you monitor your cash flow and manage it like a pro.
Cash may be king, but like all royal figures, it needs a well-organised calendar. Plan your cash flow week by week for 6-12 months in advance. You’ll then have a schedule to measure against, so you know if you’re on track or behind.
The key here is to focus on cash, not profit. Earning a profit over 12 months isn’t much use if you can’t pay your staff for a couple of months in between. Your profit and loss plan will give you the overall picture of where you think your business will be in 12 months, but your cash flow plan will detail how you’re going to achieve it.
Include all your expected incomings and outgoings. That’s wages, tax, inventory, overheads, sales, invoices — the whole lot. This will highlight periods where you may struggle, so you know to put money aside to prepare for it.
Consider making contingency plans too. What would you do if you lost a big contract? How long would you have to win new business? Should you get finance now to make yourself more resilient? Have answers ready for all these questions and you’ll be well-equipped to deal with difficult periods.
Now you’ve got your plan in place, you need to keep tabs on how your cash flow is doing. Check at least once a week, more if you need to. If you don’t have time to do it yourself — make it someone’s responsibility and ensure they’ve been trained properly.
There’s a host of apps out there that can help make this easier. Some will integrate with your accounting software, if you use QuickBooks they have a cash flow add-on, and Google Sheets have free templates you can download. They can reduce the time you spend collating your info, and help you track your cash flow against your forecast.
It’s very difficult to plan effectively if you don’t know when money will go out or come in. In business there’ll always be unavoidable delays or changing circumstances, but there are steps you can take to reduce their impact.
Set clearly defined payment terms, make sure they’re in writing and you communicate them to your clients. Without this you won’t know when you should get paid, or when to chase.
Send your invoice as soon as work is complete — you won’t get paid until you do. Send it by email so you have a record.
For long contracts, get partial or staggered payments. It could be 10% deposit to get started, 40% at half way and 50% on completion. Make sure you have enough cash flow to complete the job.
Billing hourly or day rates can be very unpredictable week to week. If you have regular clients, think about setting up a retainer. This will give you a fixed income and payment in advance, rather than an unreliable income in arrears.
Avoid asking for payment by cheque, it can be a hassle and causes delays. Bank transfer should be the norm, but direct debit could be even better. By giving the option to be paid by direct debit, you’ll have a regular income that you won’t have to chase or manage, and it’s less effort for the client too.
When you complete your plan, you’ll have identified any periods where cash flow might be a bit thin. If you can’t save enough for these lean periods then you should consider external options such as a business loan. A fixed rate business loan can help bridge the gap, and give you the certainty of knowing what you need to pay back each month.
Getting ahead of the curve will also make life much easier. If you wait until your cash flow is down and your business is struggling, you may find it harder to get credit. Even if you look strong throughout the year, having extra cash flow can make you both more resilient and open up opportunities. You’ll have more flexibility in your supply chain to negotiate better deals and be able to accept more contracts.
As mentioned above, you should have a contingency plan in case you run into trouble. Clients can go out of business, contracts can be lost, premises can flood, and unexpected repairs can appear from nowhere. If your cash flow dips below where you need it to be, there are a few things you can do to turn it around:
If you have any leeway when it comes to paying suppliers, then use whatever time your contract will allow. If you have good relationships, see if you can get an extension.
Cash in on any assets that can be spared. You could also sell equipment you own and then lease a replacement.
If you have outstanding contracts or invoices, you could offer a discount if they’re paid early. It could be money off now or in the future. Or if you’re in retail, you can try to win more sales by running a promotion. If there are any promotions that have performed well in the past they could be a good banker to turn to.
Again it’s often better to get credit set up before you need it, but if you run into trouble then it is still an option. Credit cards, overdrafts and invoice financing can give you quick access to extra cash flow. Online lenders such as Funding Circle can also provide cash flow loans in a matter of days.
Looking to boost your cash flow? Check your eligibility for a Funding Circle business loan in just 30 seconds.
11/02/22: While we want to help as much as we can, the information found here is provided solely for informational purposes and should not be considered financial or legal advice. To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, the information contained here. If you have any questions, please speak to your professional adviser or seek independent legal advice.
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