5 tips for managing a healthy cash flow

Published · 2 min read

Cash flow is the lifeblood of any small business. It can mark the critical difference between success and failure.

In the long term, businesses go bust through lack of profit, but short term, they often fail because they don’t have enough cash to pay their bills. With more firms going under due to cash flow problems than any other reason, the saying really does ring true that cash is king.

The key to a healthy cash flow lies in the word itself: ‘flow’. It’s a cycle; a careful balance of funds in and funds out. The principles of good cash flow management are straightforward: you must ensure you have more money coming in than going out and that money comes in on time so you can pay suppliers and invest in new stock.

With the average small business in the UK owed nearly £12,000 in outstanding invoices, maintaining a healthy cash flow can be a challenge. Nearly two thirds of firms (60%) are waiting 60 days or more to receive payment, and spending an average of almost 350 hours every year chasing late payments.

Understand who, where and when

Understanding your customers is the first step to knowing where company funds are coming and going. It’s vital to know your customers’ liability by understanding what type of organisation they are and the legitimacy of the business.

Learn what funds are coming in and out of the business each month and when payments are due. This will help to combat late payments occurring in the first place, and enable you to best plan when to pay your suppliers.

Have a contingency plan

If everything does crash around you, you must ensure that your clients’ and suppliers’ finances are taken care of. However, it’s necessary to have credit insurance in place in case a customer does not pay. Insurance companies and brokers offer tailored credit insurance to help protect against non-payment by customers.

Business owners must ask themselves if their customers are at risk of failure, and have considered the business impact of late payment by major customers.

Know your payments

The average small business is currently owed up to £12,000 in outstanding invoices. This shocking figure demonstrates the importance of knowing your payment schedule. Formally agreeing terms in advance with partnering companies is vital.

Small tips, such as making the payment due date clear on invoices, and having a written and signed confirmation of the agreed payment terms, can ensure all parties are aware of the payment schedule.

Chasing payment

With businesses spending almost 350 hours a year chasing late payments, you should implement a process to make this a simpler task. Use the tools at your disposal – with Sage 50, you have all the help you need.

Credit Hound Express, exclusively for Sage customers, aims to save businesses up to ten hours a week in back office administration. By making it easier to keep track of invoices and reducing time required for resolution and payment, Credit Hound Express will help to improve customer relationships.

Treat suppliers fairly

Good business practice begins with fair treatment of your suppliers. Late payment could result in damage to their business, whereas paying them by the due date leads to a good supplier relationship: crucial to business success.

Having an ethical business strategy also puts you in a better position to negotiate prices and terms in the future. The moral of the story? Treat others as you would like to be treated!

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