How to change the way you manage your cash flow

Small and medium businesses are under increasing cash flow pressure as their customers seek to extend payment terms. The UK is home to a growing number of startups forming the entrepreneurial landscape and backbone of the British economy.

In the first 10 months of 2018, circa 0.5 million startups have been incorporated in the UK (according to the StartUp Britain live tracker, as of 20 October), but why do so many fail?

The primary reason for failure (42%) is there is insufficient demand for their product or service. In other words, they’re not solving any problem or satisfying a consumer or business need in a way that is commercially viable.

This is not really a surprise as most of us will have a friend who had a business dream but the rest of the world was less than enthusiastic about it!

Of the remainder, it is a concern that a number of them (29% of total) fail because they run out of cash.

Clearly some of these failures will be because initial investment was too low or the business plan was unrealistic but for many, even with a full order book, they’re unable to continue in business because too much of their cash flow is tied up in inventory and fulfilled orders with limited ability to release it.

The significant and ongoing increase in the use of technology in financial services, driven by fintech firms, is transforming the way businesses are managed and run, offering innovative solutions that aide financial management and planning.

Fintech is quickly removing the need and burden of costly financial expertise, freeing up time for business owners to concentrate on their business and growth by providing easy to use tools, including automated debt chasing, cash flow reports, easy to use accounting software and detailed risk insights.

To fully benefit from the tools available and manage your cash flow, the basics remain imperative to survival and success. Here are four things to consider:

1. Know your customer

Clearly it is important for any business to know who their customers are and critically important to know that they can pay for the goods or services on whatever terms they are provided.

For B2C businesses, this is relatively easy as payment is predominantly at point of transfer of goods at worst.

For B2B businesses, goods and services are generally released ahead of any payment, even when on “cash on delivery” terms. In these circumstances, finding a platform that offers risk insights on customers before you work with them can help provide better understanding before signing credit terms.

2. Timely issue and payment of invoices

Immediate payment for goods and services would certainly reduce the likelihood of cash flow voids but in reality, businesses – particularly those seeking to establish themselves – need to offer reasonable payments terms to their customers.

Businesses must ensure they issue their invoices in a timely manner.

While this may be obvious, all too often the drive to deliver to customers is not matched in the administration required to get paid for what has been done.

Read more about managing your cash flow

• Improve your cash flow: 10 great tips to chase late payments
• SoAmpli: Why you need to understand your cash flow
• Invoice cheat sheet: What you need to include on your invoices

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Make it easy for customers to pay. There are many business payment options that help make payment simple and quick. Many of these are free or low cost and can encourage customers to pay more quickly.

Antiquated payment methods such as cheques generally result in delays, so go digital. There are many tools you can use to make this process efficient, such as cloud accounting software, which makes the issuing and payment of invoices as simple as possible.

Inevitably, some customers are slow at paying and businesses need to ensure they are chasing invoices promptly.

For most, this is an unwelcome burden and costly distraction from growing the business, which could be relieved by using a debtor book management tool. This can provide businesses with the ability to automate the process of sending payment reminders tailored to each customer.

In some circumstances, you could offer customers an early settlement discount to reward and encourage faster payments.

On large orders, negotiating an upfront deposit to cover some of the cost of fulfilment is an option to protect cash flow.

3. Effective cash flow forecasting

Adopting appropriate cloud accounting software and regularly maintaining it to ensure it accurately reflects the performance of the business is essential. It also provides a robust reality of the flow of monies in and out from which realistic cash flow forecasts can be created.

While most young businesses may not have a financial expert, there are many tools available, such as Fluidly, that help make forecasting cash flow simple and enable businesses to plan for cash flow voids.

They also help to make informed decisions when negotiating terms with new customers or timing of expenditure.

4. Access to alternative finance

There are many different forms of alternative finance available to small and medium-sized enterprises (SMEs) and it’s important a business finds the right funding in the context of its need, maturity and ability to repay.

Invoice finance allows you to receive an advance payment on your unpaid invoices. This cash flow solution helps you focus on growing your business now rather than waiting for invoices to be paid.

It releases tied up working capital into your cash flow so bills can be paid, payroll is met or funds are available to invest in upcoming projects.

Fintech solutions help you to receive draw capital against your unpaid invoices quickly without the need for long-term contracts, debentures or guarantees.

Other sources of cash flow assistance include:

• Peer-to-peer lending – increasing in popularity, borrowing funds from your peers rather than from a single financing entity.
• Crowdfunding – websites allow businesses to advertise investment opportunities in return for products, equity or use of the service.
• Grants – while scarcer these days, worth investigating particularly for businesses focused on innovation and conservation.

Final thoughts on changing how you manage cash flow

There are many ways to reduce the risk of having a cash flow crisis. But businesses that harness and leverage technology to ensure they understand how they are performing now and what that means for their future cash flow are going to be better placed to realise their ambitions.

We’ve seen that, when provided with flexible finance options, SMEs are able to grow and thrive rather than buckling under the pressures of managing limited cash flow.