How to keep up with cash flow as your business grows

Effective cash flow is essential to the running of any business.

Having money available to pay bills and meet expenses as they come in is necessary for keeping any enterprise afloat as well as keeping suppliers happy and ensuring your business retains a good credit rating.

However, as the recession continues to bite and with high inflation projected to continue until at least the middle of 2023 as costs of raw materials and energy carry on rising, managing the cash available to you can be particularly challenging.

In this article, we talk about why cash flow is important for your business, how to improve your cash management in challenging times, and how tech can help.

Here’s what we cover:

• Cash flow basics
• Why cash flow can be a problem for fast-growing businesses
• How serious an issue is cash management for SMEs?
• How to improve your cash flow
• Use technology to improve your cash management
• Final thoughts

Cash flow basics

Cash flow is essentially the money flowing in and out of your business.

That might be money coming in from selling products and services, while costs such as raw materials, salaries, rent, energy and taxes represent money leaving your account.

Very simply, if you have more money coming in than going out, then you have the cash you need and your business is in a good position.

If the opposite is true, you’re in cash negative territory and you need to act quickly otherwise you’ll find yourself struggling to pay your bills and your business might go under.

Running a fast-growing business is exciting and is full of opportunities.

However, the danger is that you might be so focused on fulfilling orders, meeting demand, developing new products and recruiting staff that you don’t notice that in the short term, anyway, you’re spending more than you’re bringing in.

For example, customers – especially in the current economic climate – might be slow when it comes to paying or you might not be aware of money due to leave your account that could push you into the red.

Why cash flow can be a problem for fast-growing businesses

Taking on new staff can help to meet demand and expand the business, but you’ll probably be paying out salaries and other employment costs for some time before you enjoy the business benefits that this new talent brings in.

Similarly, there will probably be a lag between the time taken to develop new products and services and the point at which you actually get to sell them to customers and see a return on this investment.

These delays and time lags can end up making even a fast-growing business with a bright future cash negative in the short and medium term.

How serious an issue is cash management for SMEs?

The UK government is so concerned about this issue that it is launching a review.

According to research by finance provider Capify, conducted among small and medium-sized enterprises (SMEs) and published in August 2022, of those asked, 37% cited cash flow as a major concern, up from 23% in Q4 2021.

Meanwhile, more than half of respondents (53%) were concerned about the levels of cash that they had in the bank, while 43% reported having less than £50,000 in their account, up six points on Q4 2021.

Unpaid invoices can be a major contributor to problems with managing your available cash – a survey published by Barclays in 2022 revealed that three out of five (58%) of SMEs are currently waiting on money which is tied up in unpaid invoices.

According to research by Sage and data innovation organisation Smart Data Foundry, 40% of all payments to SMEs in the UK are late. And the average amount owed is £22k.

How to improve your cash flow

There are a number of ways that, as a fast-growing business, you can improve your cash position and ensure you’ve got enough money in the bank.

Invoice financing

Making sure customers pay more quickly is one way to boost your cash flow. But if you’re struggling here, you can always consider an option such as invoice financing.

Here, you use your outstanding invoices to raise money, either by offering them as security for loans or by selling them to a finance provider.

The finance company to which you sell your invoices will pay you immediately and then, as the new owner of those invoices, will chase your client for payment. They usually charge you around 10% to 15% of the total amount of the invoices.

This represents a trade-off – you don’t receive as much money as you would without this kind of invoice financing, but you do get paid more quickly.

Angel investing

An angel investor, also known as a private investor, is a wealthy person or High Net Worth Individual (HNWI) who provides capital for early stage businesses in return for a minority stake (usually between 10% and 25%) in the business.

They normally use their own money and might make a one-off payment or a number of cash injections.

One of the advantages of using an angel investor is that they can also act as a mentor, providing their own business experience and knowledge of a sector as well as their financial support.

They’ll very often take a more practical, hands-on approach than other investors. In some cases, an angel investor might put together a syndicate of other angel investors in order to share the financial risk.

The UK Business Angels Association website has more information and advice.

Venture capital

Venture capital works in a similar way to angel investing in that it provides investment for young, fast-growing businesses and can help to ensure they have enough cash in the bank.

Here, though, the investment will come from a company or fund rather than an individual.

As the British Private Equity & Venture Capital Association (BVCA) points out, some of the UK’s most successful new companies have benefited from venture capital funding.

These include Wise, the financial technology company; Moonpig, which produces personalised greeting cards, flowers and gifts; and cheap flight website Skyscanner.

Similar to venture capital is private equity but this is normally more relevant to larger, longer established companies.

For early stage businesses, venture capital investors will normally take a stake alongside other investors. This usually involves SMEs going through fundraising rounds known as Series A, B and C and so on.

Like angel investing, both private equity and venture capital can bring expertise and mentorship from experienced individuals as well as investment.

According to industry analysts Global Data, UK-based startups raised $18bn (£15bn) in venture capital funding in the first half of 2022.

To get venture capital funding, you’ll need to identify the value of your business, and this involves calculating its total assets, revealing your profit margins and your outgoings as well projecting future sales and profits.

You’ll then need to determine how much funding you need before creating a persuasive pitch and identifying venture capital funds that might be interested.

Business loans

Banks and other lenders offer a range of business loans.

The government also has a Start Up Loan of between £500 and £25,000 if you’re in the earliest stages of developing your business and you meet its criteria.

Then, there are online platforms such as Funding Circle and iwoca that provide business loans that can help improve cash management among other challenges for SMEs and new businesses.

It’s also worth looking at comparison sites such as Nerdwallet, Think Business Loans and Go Compare.

Even if you decide not to apply for a loan, the discipline of analysing your financial performance and checking you have all the relevant information – essentially, ensuring you really know about how your business is performing – is useful.

Use technology to improve your cash management

Introducing digital systems rather than relying on paper and spreadsheets or having your teams carry out repetitive, manual tasks that technology can now handle is a good way of improving your cash position.

Automated invoicing and bookkeeping solutions mean you can issue your invoices more quickly and easily and – importantly for effective cash management – identify who hasn’t paid, so you can chase them up.

Clients will also find it easier to pay with online systems if you add a payment link to your online invoices.

Using cloud accounting software means you can set budgets and monitor expenses more accurately and update your figures more quickly and easily.

You’ll also enjoy better inventory management – another important factor when it comes to remaining cash positive.

Finally, for good cash management, accounting software allows you to make forecasts, so you can anticipate when your funds might be low. You can then remind customers of outstanding invoices, enquire about a loan, or delay, if possible, some outgoing payments.

When you’re running a busy, fast-growing business and grabbing every new opportunity as soon as it comes in, keeping an eye on your available cash might not be at the top of your agenda.

But you should make this a priority to avoid running into financial difficulty.

Final thoughts

Putting the right systems into place to monitor cash flow and being prepared to take action to keep cash positive even before red lights start flashing is essential.

Once you’ve put these financial building blocks in position, you can concentrate on what you enjoy doing and focus on growing your business.