Cash flow. It’s the lifeblood of any business but it’s one of the hardest aspects of managing an SME. If hearing the words ‘cash flow’ is enough to make you break out in a cold sweat, you aren’t alone. Research suggests that this seemingly straightforward concept is tricky to get to grips with. So much so, it could be the difference between the success and failure of your business.
Whether it’s due to poor planning, a lack of understanding, late payments or unexpected expenses, half of UK businesses are currently facing cash flow challenges, and the majority of owners are concerned those issues are holding their business back.
If you’re in the same camp, we totally understand the frustration and anxiety that come along with not knowing how you’re going to bridge the gap between monies trickling in, and the flood of cash racing out the door. Read on for our top operational strategies to take back control of your cash flow.
Operational strategies to manage cash flow
There’s more to managing your cash flow than chasing overdue invoices. To optimise your business finances and ensure you have the funds available to cover your expenses, you’ll need to be red hot when it comes to managing your money. This is a critical skill and one that every long-standing business has mastered, because it’s that proactive approach that helps to keep the lights on through the darkest patches.
Invoice factoring
If your clients routinely pay late, you might find that your finances are becoming harder and harder to manage. You’re covering costs up front for services, salaries, parts or equipment, and then waiting beyond the agreed timeframe for payment from your customer. It’s easy to see how your bank balance can quickly slide the wrong way.
Invoice factoring is one way to bridge the gap when slow payments become a regular occurrence. With this strategy you ‘sell’ your invoices as they are raised to a third-party company. That company makes payment to your business, and they will then take payment from your client. There is a fee for this service, so you will forfeit a portion of the payment amount, but the upside is your incomings will be much easier to predict and manage.
If your time is being eaten up chasing overdue invoices on a regular basis, invoice factoring can give you back those wasted hours, not to mention relieve some of the administrative burden.
Tighter credit control
If you don’t want to pay a percentage of your sales to an invoice factoring company, you’ll need to implement stricter credit control measures. Reducing payment terms to repeat late payments is one way to improve your finances in short order.
You could impose 7 or 14 day payment terms on the worst offenders and begin to charge late payment fees on overdue invoices. Just one or two late payment charges could be enough to encourage the worst of your late payers to be more organised.
Change your invoice practises
It isn’t just late payments that can derail your cash flow and leave you struggling on a regular basis. Paying up front of goods and then waiting weeks or months to be paid by your customers can eat up your working capital and leave you short when it comes to paying HMRC, payroll and other vital expenses.
Making one simple change can make a huge difference. By that we mean increase the frequency of your invoices. Instead of waiting until a project is completed in full, bill at pre-agreed milestones through the project. This means you aren’t carrying the cost for weeks or months when you need to buy goods and materials to deliver your client projects.
Renegotiating terms
Whether your business is thriving, struggling, scaling or scaling back, renegotiating terms with suppliers ensures your agreements are aligned with the needs of your business.
Often, this is something that’s done only as and when needed but this can lead you to accept terms that aren’t as favourable as they could be due to the time crunch. Negotiating a better deal could see you achieve a more favourable price, longer-term fixed pricing to safeguard against future hikes, faster delivery, a longer warranty period or extended payment terms.
Collecting quotes from other suppliers will give you a clearer idea of average costs and typical terms so you can make an informed decision rather than operating on gut instinct alone. It’s also good practise to be up to date on alternative suppliers and shop around for a better deal before renewing.
Expenditure audit
If you ever feel like your money is vanishing into thin air and you just can’t figure out why there isn’t more cash in the bank, a full expenditure audit is essential. This doesn’t just give you clarity on what you’re spending, it’s also an opportunity to identify money that’s being wasted on unnecessary expenses. We aren’t talking about a cheeky staff lunch here and there. This is more about those bigger, ongoing expenses that could be draining your cash flow without you even realising.
It’s estimated that UK businesses spend around £600 million per year on unused subscriptions. Around half of businesses continue paying for subscriptions they no longer need, long after the tool itself has stopped being useful. When auditing your expenses, you may find multiple examples like this where you’ve set up a recurring payment and simply forgot to cancel it.
This isn’t just a waste of money; it’s also a clear sign that you need to take a more proactive approach to managing your cash flow.
Looking at your staff rotas could also highlight inefficiencies and unnecessary expense. Do you have too many staff at quieter periods for example?
Get creative about how you use your assets
Bridging a cash flow gap can feel impossible during slower periods. If, despite your best efforts, you simply can’t make enough sales, a creative approach could help to fill some of that shortfall. Do you have office or commercial space you aren’t using or could free up? If so, you could rent out that space to generate a regular monthly income to firm up the books.
Do you have equipment that you don’t need or aren’t using? Consider offering it for lease rather than letting it sit idle.
Business restructuring
If your business is still struggling and you have the likes of HMRC breathing down your neck, the Boardroom Punks can pull you back from the brink. Our business rescue and business restructuring pros will take a deep dive into your business. With solutions like game-changing repayment plans, short-term business funding and a much brighter future. Give us a call to find out more.
