How to improve cash flow: 5 important tips

Want to know how to improve cash flow? Even a successful small business can go to the wall frighteningly quickly without proper management of it. This article looks at ways to improve cash flow and what you need to do to keep on top of your finances.

After all, you founded your business on a great idea and you execute on that idea superbly. And now you want to stay successful. But cash flow issues make up the one reason companies with perfectly respectable paper profits can plunge into bankruptcy. Why?

More customers equals more complexity

The quick answer is that running a business, even a very profitable one, costs money. You might be seeing growing sales and happy customers, but you’re also spending on materials, staff and premises while servicing finance.

When businesses grow, they quickly become more complex. This complexity makes it more difficult to see the cash position now and forecast what it will be weeks and months in the future.

When you have just a few customers, keeping on top of their payments can be fairly easy. You can do it in your head. But if you have hundreds of customers, who is checking when they will all pay? Do you know if they’re paying late? Is anyone chasing them for payment?

How to improve cash flow

For some businesses, improving cash flow can be challenging – but it doesn’t have to be the case. Follow these five tips to stay on top of your cash flow.

1. Manage spend wisely

The same applies to spending. Understanding cash flow is critical when working with suppliers. You need to understand how many suppliers you have, what you pay them and when.

For example, do you spend more with a supplier to get a high-volume discount on materials, or keep hold of cash and buy in small amounts at a higher price?

It’s impossible to make these decisions without knowing and forecasting your cash position.

2. Timing capital investments

Growing businesses require more capital. At some point, if you’re ambitious, you’ll need to make some big decisions.

When do you need larger premises? When do you need a bigger IT system? If you’re making things, do you need more machinery? Do you need to hire more people?

You’ll need to make these investments if you are to keep your customers (and your employees) happy. Crucially, you’ll need to do so before they pay you. And it would be suicidal to do so if you don’t understand the cash position of the business, now and in the future.

Remember, you’ll also need to keep the business running day to day, spending on bills, taxes, small items, travel and rent.

3. Don’t lose sight of cash

Small business owners are often very focused on gaining new customers and satisfying the ones they have. The problem is, if no one is focusing on liquidity, things can go wrong very quickly.

If two customers fail to pay substantial invoices in the same week you settle a big supplier bill, you have to hope the bank will extend your finance. If it doesn’t, you could be in trouble.

It’s worth repeating that this frequently happens in otherwise successful, growing businesses – and often causes their downfall.

4. Get a cash flow forecast in place

Accountants will tell you that cash flow problems rarely occur out of the blue. The chances are the warning signs have been there for a while, but no one has noticed them.

The vital question is: do you know what your cash position will be in six months’ time? If not, you may struggle to cope when things go wrong.

If you can forecast that far forward and it doesn’t look good, you still have time to put in place a strategy to make it through the difficult growth period. And it’s important not to confuse the bank balance with the cash book.

Managing the business from the bank balance is like driving a car by looking only in the rear view mirror. You’re seeing what’s gone past, not the pothole you’re about to hit. A good cashbook will lead to better forecasting.

5. The right tools can help

The tools for efficient bookkeeping are getting easier to use and are available, via the cloud, on a pay-as-you-go basis.

Conquering cash flow won’t hold you back, it will be a catalyst for driving the business forward. Doing it proactively is more efficient than firefighting and gives you more time to spend with customers and keep the business growing.