How to manage cash flow in your business

19 January 2022


Expansion & Improvement

Cash is the lifeblood of any small business but many SMEs struggle to manage it. According to research by Intuit, approximately 57% of UK small business owners have experienced problems with cash flow, with 38% struggling to pay outstanding debts. Managing cash in your business needs to be a core concern, based on sound processes, planning and visibility.

Gary Heywood explains the key habits that separate cash-conscious businesses and how working with an advisor can make all the difference when it comes to turning your cash position around.

The cash challenge

Cash controls everything within a business and not just your spending. Running low on liquid capital can be a huge drain on management time, juggling responsibilities to suppliers, employees and tax authorities while also trying to keep the business running.

The first step is to start your business off with enough capital. Whether that be from savings, friends and family investment or bank funding. However, even once your business is profitable, it can be difficult to maintain positive cash flow without the right processes to underpin good financial habits.

This can lead to businesses that are making money on paper struggling to meet financial obligations, or even stay afloat.

Financial habits of positive cash flow businesses

While there is no silver bullet for improving cash flow, there are habits and processes that can provide you with more flexibility, visibility and control over your cash to help you make the right decisions.

1. Create financial visibility

The first step in managing your cash is to know what cash you currently have, what is owed and what is owing to you.

Without visibility over these core metrics, you may not even know whether you are cash flow positive or negative, how much cash you have available or whether you’re in trouble.

This starts with capturing information going in and out of the business at the point of creation:

  • Using an expense and sales data capture app can help reduce the time between generating an invoice and registering the information on your accounting system.

  • By working with an online accounting solution such as Xero or Quickbooks, you can centralise your financial data to be visible to key stakeholders in the business.

  • Each month, this data should be used to create reliable management reports covering: 

- Current cash balance
- Income
- Debts
- Profit

2. Prioritise getting paid

There is a crucial, and often material, difference between doing billable work and getting paid for it. You may be in a position where you are doing plenty of work but not actually collecting the cash at the right time, and these timings can make or break a business. To minimise the risk:

  • Once a project is complete, set benchmark timings for getting it out of work-in-progress and into outstanding debtors.

  • Ensure that your payment terms are aligned with your cash needs. Ideally, you want to get paid as quickly as possible, while extending windows for your own payments as far as possible to give you maximum control.

3. Optimising your accounts payable

As well ensuring you have enough money coming into your business, it’s crucial to keep an eye on outgoing cash flows too:

  • Regularly review your costs, subscriptions and contracts to ensure that each is essential.

  • For recurring payments, negotiate the longest payment terms possible in order to give yourself flexibility, ideally with longer terms than those that your customers are paying you on.

4. Managing your cash runway

Alongside management reporting should be a stringent focus on your cash runway, planning your future cash obligations. It’s essential as a business owner that you have a detailed view of your cash needs over one month, three months and twelve months.

The nearer the window, the more detailed your runway analysis must be. It should cover both how much you will need to spend, and how much you need to make in order to meet those debts and reach your growth targets.

This should be reviewed regularly. As soon as the month is over, assess the viability of the next month’s plan based on your most recent performance. It’s especially important that your plan takes into account significant future obligations, such as quarterly VAT payments, so that you can set aside sufficient cash.


5. Pick the right customers

While it’s important to have customers to keep your business afloat, the wrong customers can end up doing as much damage as no customers at all. Especially for small businesses, working with much larger customers can create an unequal power dynamic where the smaller party is at their mercy.

This can translate to lengthy payment terms, unstable contracts or pressure to reduce rates, all of which can threaten your cash position. By picking clients with whom you can create value and trust-based relationships, you can create more stability and mutually beneficial trading conditions for both parties.


6. Be conservative with withdrawals

While the first profits in the business can be an exciting time and a deserved reward for all the work you have put in, it’s important to be cautious with removing money from the business. Profits are also your protection against future uncertainty.

A good benchmark is to ensure that your business is always holding enough cash to pay 6 months of overheads. If all income stopped tomorrow, you could cover your costs (salaries, tax, rent etc.) for half a year.


7. Proactive communication

Most businesses will at some point have a moment where they need flexibility with their payment terms. It could be you, your suppliers, or your customers. In every case, communication is essential.

When it comes to your customers, you may be relying on having money owed coming in at the end of the month to help you meet your own debts. If there is any issue with your customers paying, you need to know as soon as possible, and not the day before your own payments are due.

By communicating regularly, you can catch potential shortfalls early, negotiate new terms and manage your own obligations.


Cash management in practice

An important point to note is that it’s never too late to acquire these habits. And once you do, they immediately bring benefits to your business planning and performance.

When updating financial processes, prioritise:

  • Getting management information up to date - even if it’s behind, gather all available information to get a clear idea about where the business is financially, including risks and opportunities.

  • Creating a new budget based on accurate data - a good start is a two year budget that can help the business monitor resources, track income and outgoings.

  • Create regular review structures to compare targets - see which products and services are working, which clients are adding value and prioritise cash-positive activity.

Make your cash work for you

Keeping your business moving forward requires the right processes, practices and support. By implementing the steps above, you can ensure you’re on top of your cash position and create security for the future.

Working with the right financial experts can help take your business even further. Our team in High Wycombe have worked with thousands of businesses to build the right systems, advise on growth and optimise every part of the operation for maximum flexibility and performance.


Get in touch with us to talk through how you safeguard your future success and achieve your goals.