When the economic climate is tricky and you are looking for ways to ensure your business thrives, not just survives, it’s vital to get effective cash flow management in place. Businesses that successfully manage cash, wealth and capital well tend to be more profitable in the long run.

In times of higher costs and inflationary pressures, profitable businesses may run into trouble if cash flow is not well controlled. Even small businesses need a clear cash flow management strategy from the start. It reduces stress, helps you plan ahead, and shows your lenders and advisers that you have control over your business. This 9-point guide covers

  1. Start with good cash flow forecasting
  2. Plan for different scenarios and understand the challenges of your industry
  3. Consider your one-day cash flow value
  4. Provide cash flow training for your team
  5. Communicate effectively within your business
  6. Make sure you get paid promptly
  7. Manage with oversight
  8. Control your stock and fixed assets
  9. Put the right finance options and funding liquidity in place

1. Start with good cash flow forecasting

Accurate cash flow forecasting is vital for all businesses so you can identify when you might struggle to pay your bills.

Create a weekly or monthly cash flow forecast for at least the next three months, ideally longer.

  • List all your expected cash receipts when they are due for payment
  • Add all your planned expense payments
  • Calculate the net cash balance

If the net cash balance is negative, this signifies a time when you might find it harder to pay your bills.

If you are creating a cash flow forecast, it's Important to keep your bookkeeping up to date. Whilst it can be challenging to stay on top of processing expenses and creating invoices, if you can, you'll be able to forecast more accurately, making your business more successful in the future.

You could also consider implementing a credit control process to manage your trade debtors – customers who owe you money. This will help you bring in the money when you expect it to hit your bank account rather than chasing for overdue payments that could turn into aged debts.

Make sure you update your forecast regularly. How frequently you update your forecast will depend on

  • Your forecast accuracy
  • Cash flow fluidity
  • How much your business plans rely on positive cash flow

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2. Plan for different scenarios and understand the challenges of your industry

Your forecast will be impacted not just by your own planned business activity but by external factors in the global business community as well as world events that you cannot control e.g. higher staff costs due to inflation linked pay increases. However, scenario planning can help you see the potential impacts on your cash flow situation.  What would happen if:

  • Distribution costs increase?
  • Raw materials prices go up?
  • Customers take longer to settle invoices?
  • Interest rates or taxes change?

Scenario planning gives you insight into how your business might cope should things change in the future and confidence that you could ride out any increases in costs or reductions in sales, at least for a while.

Different industries have different cash flow issues. Here are a few examples:

  • Manufacturing businesses with stock and work-in-progress can have significant cash tied up in the business
  • Tradespeople may need to buy materials in advance of payment
  • Businesses that have foreign currency payments may find budgeting more challenging when exchange rates are fluctuating

Understanding the challenges of your industry ensures your business is in the best possible place to cope when the economic situation is difficult.

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3. Consider your one-day cash flow value

“Think about the value of just one day of cash flow to help you understand its importance,” says Merisa Lee Gimpel, Managing Director, Head of Working Capital Solution Development, at Lloyds Bank. Merisa suggests you work out what would happen if you:

  • could collect your receivables one day quicker
  • couldn’t sell your stock until one day later
  • could pay your suppliers one day later

Considering the impact of these scenarios can help you think about the trade-off between cash flow and profit. You can use this knowledge to inform a negotiation to extend your payment terms. Managing your trade creditors can make a significant improvement to your cash flow, giving you more time to receive cash from your customers to pay those bills. Here are some ways to hold onto your cash for longer:

  • Don’t make payments sooner than you are contractually obliged to
  • Renegotiate longer payment terms
  • Offer staged monthly or quarterly payments rather than paying at the end of a contract
  • Set aside disputed debts with suppliers but keep current payments up to date
  • You could also negotiate payment terms with other creditors such as HMRC and finance companies if you have a short-term need to improve cash flow

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4. Provide cash flow training for your team

Train your purchasing department, stock management and sales teams to understand the importance of cash management and to work closely with your finance team to optimise cash flow.

This could mean that the sales team offers different payment terms to different customers based on sales volume or historical payment records.  It could be that your purchasing department negotiates longer payment terms or staged payments from suppliers. Perhaps your stock management team liaises with the sales department to run a promotional offer to sell a product that isn’t moving fast.

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5. Communicate effectively within your business

When your teams know how to accurately forecast, you'll be in a much better position to deal with any cash flow challenges. Include all the relevant departments in your communications about cash flow and ensure that everyone takes part in regular updates of the forecast.

Finally, review the forecast against the actuals with relevant team members to understand what caused any major variances so you can improve future forecasting. Help your team understand that variances are expected but the aim is to become more realistic about sales, purchases, and stock levels for future forecasts.

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6. Make sure you get paid promptly

Communication isn't just an internal issue, it can also help to reduce payment delays, says Merisa Lee Gimpel. This matters especially when you are a small company dealing with much larger corporations. Here are some things you could do to get paid sooner:

  • Credit check new customers before you take them on, and if in doubt get them to pay in advance
  • Issue invoices promptly, ensuring they have all the correct information on them to facilitate smooth payment
  • Chase outstanding debts, focusing on customers whose invoices have been outstanding longest or who have a history of late payments
  • Have a defined escalation process around late payments, only allowing for flexibility in particular circumstances, such as bereavement
  • Consider negotiating disputed invoices that have been outstanding for a long time If you are happy to accept part-payment
  • Hand over your credit control to a specialist agency if necessary
  • Negotiate with customers to pay sooner in exchange for an early payment discount
  • Renegotiate payment terms with customers to reduce the number of days credit you offer

Don't be afraid to enforce contract terms, even though it might feel a bit uncomfortable when all businesses are feeling the pressure of rising prices.

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7. Manage with proper oversight

Managing your cash flow should be part of your regular monthly finance activity. To do this properly, you’ll need up to date reporting on your cash position, trade creditors and debits, inventory and fixed assets.

Your accounting system should be able to produce most of the reporting requirements to enable you to review:

  • Aged debtors - which invoices are overdue and by how many days?
  • Credit terms - what terms are you offering and should these be renegotiated for particular customers?
  • Other incentives - are early payment discounts working to reduce your trade debtor balance over time?
  • Aged creditors - which payments you owe and how overdue they are?
  • Payment terms - what terms are you getting with suppliers and is there scope to get longer terms?
  • Stock levels - how much stock are you holding and how long does it take to sell product?

Your cash conversion cycle is the average time you have money tied up in your business. It's made up of:

  • the average time your customers pay
  • the average time you have stock in warehouses and on shelves
  • the average time you pay your suppliers

If the average time that cash is tied up in your business is increasing, it’s time to consider making some changes to reduce the conversion cycle.

Cash flow forecasting may seem like a lot of additional effort on top of your usual bookkeeping and financial reporting, but your business is much more likely to cope with any difficult periods if you always have a clear picture of your cash position.

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8. Control your stock and fixed assets

Stock includes the raw materials and finished goods you hold prior to being sold. If you can reduce the amount of stock you are holding then you could free up additional cash. It also includes overheads which are the costs you incur each month whether your business sells any product or not. It is especially important to review these costs if your turnover has dropped and is likely to remain lower for a significant period.

Consider the following ways to control your stock costs:

  • Implement a 'just-in-time' approach to buying materials for production to reduce stock holding costs such as inventory managers and warehousing. This should be balanced against the need for flexibility and ability to respond quickly to changing customer demands particularly given the level of risk and uncertainty in supply chains
  • Negotiate reduced rent or a rent-free period from your landlord
  • Improve the terms on your utilities and other overheads wherever possible
  • If you are over staffed, consider reducing the working week rather than laying off staff so that it is easier to flex back up once the economic situation improves

Fixed assets are items used in your business to generate income. Assets include property, plant, machinery, computers, equipment and vehicles. Fixed assets can tie up lots of cash and they generally take longer to liquidate than your current assets such as debtors.

It’s a good idea to periodically review your fixed assets ledger to identify easy ways to reduce your fixed assets:

  • Think about your planned capital expenditure - is it really necessary?
  • Can you lease rather than buy to reduce monthly spend?
  • Could you sell underutilised assets to generate positive cash flow?

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9. Put the right finance options and funding liquidity in place

If your business is seasonal or your cash flow is unsteady – for example you are a retailer who does most business around Christmas – you'll need to think about the best ways of financing.

If you need to collect cash more quickly from your customers, you can sell the debt to an invoice factoring company who will pay you 90% of the invoice value immediately. Once the customer has settled this invoice, the factoring company will pay you the remaining 10% less their fee.

You could choose to renegotiate your overdraft facility with your bank If you can see that your cash needs are short-term but if your forecast suggests a longer-term challenge, you could look at more structured forms of financing such as bank loans. Alternatively, trade loans or working capital loans may be available for companies that have significant trade flows. Trade loans are used to bridge the gap between the purchase of product and payment from the end customer.

Keeping a close eye on your cash flow means you can plan for potential periods of shortfall and get the best deals possible. If your business unexpectedly runs short of cash, this can be stressful for all and end up costing you a lot more to rectify.

You can also consider using any surplus cash more effectively by putting it into interest-earning accounts to generate extra income rather than leaving a high balance in a non-interest paying current account. Talk to your bank to find the best option available.

Managing your cash flow is a vital element of running a sustainable business. When the economic situation is fluctuating, leading to uncertainty and volatility in prices, all businesses, whether long established or just starting out can benefit from advice, funding and support. Creating an environmentally friendly business is a great way to help the planet and save costs at the same time. Find out more about Green Finance from our team of ESG and sustainability experts.

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