Practical tips for improving your business cash flow

Cash flow is the lifeblood of any business, ensuring that day-to-day operations run smoothly and future growth remains achievable. However, we are often called upon to support otherwise good businesses who are struggling with cash flow issues that threaten or have led to financial instability. Here are some things to watch out for and practical strategies to help you maintain a healthy cash flow and keep your business on a strong financial footing.

Common cash flow challenges

It is not enough to have an ostensibly sound business with a great name backed by innovation, good products or services and a strong order book if you run out of cash or are in danger of breaching your financial agreements. How are you going to pay your staff, the suppliers who provide your crucial raw materials, your rent, your bank or HMRC liabilities?

It really is not uncommon for me to work with businesses with a strong basic proposition, even boasting an impressive P&L but to be dangerously close to encountering a cash flow crisis. It can be immensely stressful for owners/managers – some of whom will have seen issues looming but for others coming as a very nasty surprise. And if they can’t get on top of the situation, readily plug the gap in cash flow, renegotiate terms with creditors or secure additional funding it can ultimately prove fatal to the business.; This can have a potentially devastating ripple effect across supply chains and even personal consequences for directors.

There are a list of usual suspects which make regular appearances in firms facing or at risk of facing cash flow difficulties. These include:

• Late payments from customers – Delayed invoicing or delays in payment from customers can increase business risk generally as well as severely disrupting cash flow and creating financial stress.
• Poor expense management – Uncontrolled spending or being blindsided by unexpected costs can quickly deplete cash reserves or put businesses at risk of breaking credit terms or their banking arrangements
• Overstocking – Holding excessive stock ties up capital that could be used elsewhere.
• Seasonal fluctuations – Some businesses experience peaks and troughs in revenue, making cash flow inconsistent.
• Inadequate financial planning – Taking into account all of the above, without proper forecasting, businesses may struggle to cover essential costs.

The antidotes to the above issues are likewise familiar territory when it comes to offering advice to businesses.

1. Encourage prompt customer payments
   • Invoice promptly, keep good records and follow up on overdue payments regularly. If your debtors’ list is looking extended investigate why and look closely at problem payers – it could be they are suffering with cash flow issues that you don’t want to become contagious to your business.
   • Offer incentives for early payments, such as small discounts.
   • Consider using automated invoicing and payment reminders to speed up collections.
2. Negotiate supplier terms
   • Negotiate longer payment terms with suppliers to better align with your cash cycle.
   • Regularly review your input costs and your supply chain and be prepared to look to retender/renegotiate or to seek bulk purchase discounts where feasible to improve cost efficiency.
3. Control your expenses
   • Review your business expenses regularly to identify areas for potential cost savings.
   • Consider leasing equipment instead of purchasing outright to preserve cash. This may also be a more tax-efficient way to manage capital assets.
   • Reduce discretionary spending during slower periods.
4. Manage inventory efficiently
   • Avoid overstocking by carefully monitoring inventory levels.
   • Analyse sales patterns to optimise stock purchasing decisions.
   • Use just-in-time ordering where possible to minimise tied-up capital.
5. Improve financial forecasting
   • Prepare a cash flow forecast to anticipate upcoming income and expenses.
   • Regularly review and update your forecast to reflect changes in trading conditions.
   • Consider setting aside cash for known liabilities eg. VAT and Corporation Tax – perhaps in a business savings account paying interest
   • Set aside an emergency fund to cover unexpected shortfalls.
6. Explore financing options
   • Consider using invoice financing or short-term loans to manage temporary cash flow gaps.
   • Open a business overdraft facility as a safety net for unforeseen expenses.
   • Seek professional advice before committing to any financing solutions.

As any business who has worked with me would tell you, one of my first pieces of advice – whether you are a start-up or established household name – is that proactive cash flow management is crucial for maintaining financial stability and ensuring business growth.

By regularly interrogating your cash position and implementing the above strategies, you can improve your cash flow and build a more resilient business. If you need further guidance or a tailored cash flow strategy, please don’t hesitate to get in touch.