One of the many issues of being a business owner are the sleepless nights worrying about all the things you are responsible for and not always having control of them. Well money is certainly one of those major elements and to help you all get a better night’s sleep I’ve written this blog. In the dynamic world of small businesses, the phrase “cash is king” is more than just a saying; it’s a fundamental truth. Understanding and managing cash flow is essential for the survival and growth of any small business. But what does it mean to “crack the code” of cash flow, and why is it so crucial for your business?
The Importance of Cash Flow
Cash flow, simply put, is the movement of money in and out of your business. It’s about timing and management – ensuring that you have enough cash at hand to meet your obligations, from paying suppliers to keeping the lights on. In the tumultuous economic landscape, especially post-Brexit and amidst global uncertainties, mastering cash flow can mean the difference between thriving and merely surviving.
For small businesses, effective cash flow management is not just about staying afloat; it’s a strategic tool for growth. It allows you to make informed decisions, seize opportunities, and avoid the pitfalls of financial mismanagement.
Understanding the Basics
Before diving into advanced strategies, it’s important to grasp the basics of cash flow. There are two types: positive and negative. Positive cash flow occurs when the cash coming into your business (from sales, accounts receivable, etc.) is more than the amount leaving your business (expenses, loan payments, etc.). Negative cash flow, on the other hand, is the opposite and can signal trouble.
It’s crucial to understand that cash flow differs from profit. You can be profitable on paper, with healthy sales, but still face cash flow issues if your incoming cash is delayed or if you have significant upfront expenses. How many times have you thought “I’ve won all this business but where’s the money?”
The Cash Flow Statement: Your Financial Roadmap
One of the most critical tools in managing cash flow is the cash flow statement. This financial document provides a detailed overview of the cash inflows and outflows over a specific period. It’s broken down into three sections:
Operating Activities: This section shows the cash generated or used by the day-to-day business operations. It’s a good indicator of the health and efficiency of your core business.
Investing Activities: This includes cash spent or earned from investments, like purchasing equipment or selling an asset.
Financing Activities: This section reflects cash movement from financing activities, such as loans, equity, or dividend payments.
Understanding and regularly reviewing your cash flow statement is crucial for making informed business decisions.
Practical Steps to Improve Cash Flow
As I mentioned, we want to see a positive cash flow in the business so here are some actionable steps to improve your business’s cash flow:
Invoice Promptly and Follow Up: Delays in invoicing can lead to delays in payment. Ensure that you invoice your customers immediately after delivering goods or services. Using accounting software can actually automate regular invoices especially if you offer a subscription-based service. Equally important is to implement a system for following up on outstanding invoices, ask yourself how long are you prepared to be a bank for your customers because if they are late in paying you, that’s what you have become.
Manage Your Payables: While it’s important to pay your bills on time, take advantage of the credit terms offered by your suppliers. Don’t pay too early if you don’t need to.
Monitor Your Inventory: Excess inventory ties up cash. Regularly review your inventory levels and adjust them according to your sales patterns. If you sell 100 a day and it takes three days to get a delivery having 10,000 in the stock room doesn’t make sense and is tying up cash you could use to get early payment discounts.
Consider Various Payment Options: Offering multiple payment options to your customers can speed up the receipt of funds. Digital payment methods can ensure faster processing than traditional methods. This also reduces time spend chasing payments as its automated, it just happens. Some members have saved 100s of man hours doing this which is time then spent on more revenue generating activities, win-win.
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Are you a business owner looking to take your business to the next level? Join our innovative community of like-minded professionals and gain access to a wealth of valuable resources, including a community portal to chat with other business owners, ebooks, business development software, and growth events that will transform the way you do business. Best of all, these resources are completely free and will be available to you forever.
But the benefits of joining our NoLimits business community don’t stop there. By becoming part of our community, you’ll have the opportunity to connect with other business owners, share insights and ideas, and build valuable relationships that will help your business thrive. Don’t miss out on this amazing opportunity to supercharge your business and join us today!
Cash Flow Forecasting: Anticipating the Future
What is Cash Flow Forecasting?
Cash flow forecasting involves predicting the flow of cash in and out of your business over a future time period. This forecast helps you anticipate periods of tight liquidity and plan accordingly. If there is a challenge ahead you get to see it early and you can take corrective actions. It’s not about precision; it’s about having a clear estimate to guide your decisions.
How to Create a Cash Flow Forecast
Start with Existing Data: Use your historical financial data as a baseline. Look at your past cash flow statements to understand your regular income and expenses. If you don’t have these in this form you can simply use your bank statements over the last month / quarter / year and down loads them in to an excel file. This way you can de-duplicate and see income and expense items.
Estimate Future Sales and Expenses: Based on your business trends and market analysis, estimate your future sales. Don’t forget to factor in seasonal fluctuations. Similarly, project your future expenses, considering both fixed costs (like rent) and variable costs (like materials). Also remember that some costs are more regular than other such as annual membership fees or daily stationary costs.
Include One-off Items: Include any known future expenses or income, such as a planned equipment purchase like a laptop or a one-time contract.
Review Regularly: A cash flow forecast is a living document. Regularly update it with actual figures and revise future estimates to remain accurate. I would recommend if you have enough cash in the bank to survive six months of fixed costs with no income then a monthly review is sufficient. If your fund reserve is less than six months then a weekly review would be strongly suggested as best practice.
Effective Cash Management Strategies
With a forecast in hand, you can employ strategies to ensure a healthy cash flow:
Tighten Credit Control
Credit Checks: Conduct credit checks on new customers before extending credit.
Clear Payment Terms: Set and communicate clear payment terms upfront.
Incentivise Early Payments: Offer discounts for early payments to encourage quicker cash inflows.
Manage Outgoings
Negotiate with Suppliers: Ask for longer payment terms or bulk purchase discounts.
Regular Expense Review: Regularly review and cut unnecessary expenses, for example, do you really use all those software subscriptions?
Utilise Financing Options
Overdrafts and Short-Term Loans: For short-term cash shortfalls, consider using overdrafts or short-term loans, but be mindful of the costs. Larger businesses do this all the time, if you can demonstrate that having say, £25,000 now will generate more profit than the £1,100 interest you’ll be charged for a year’s borrowing at 8%, then borrow.
Invoice Financing: This can free up cash tied in unpaid invoices. This is for poor or unpredictable paying clients. Be the most careful with this type of financing as it is, in my own opinion, the most difficult one to get out of.
Diversify Revenue Streams
Explore New Markets: Diversifying your customer base can provide more stable cash flow. Rather than having 10 clients spending 10% trying having 30 spending 3.33%, reducing slow payment risk.
Develop Recurring Revenue Models: Consider subscriptions or retainer models for steady income. If you sell a product which is a one-off sale – what about maintenance?
Measuring Automation & Workflow Success
To evaluate the effectiveness of automation initiatives, it’s necessary to establish key performance indicators (KPIs) and track progress.
Monitor metrics such as time saved, error reduction, increased productivity, and cost savings.
Regularly review and analyse the data to assess your automation efforts’ return on investment (ROI).
Adjust your strategies as needed to optimise results and maximise the benefits of automation.
Conclusion:
Automation presents a powerful opportunity for small to medium-sized businesses in the UK to streamline operations, increase efficiency, and focus on growth.
Businesses can unlock maximum potential by identifying repetitive tasks, choosing the right automation tools, implementing workflow automation, embracing data automation, and measuring success. Embrace the power of automation, free up valuable resources, and position your business for success in the dynamic UK business landscape. Stay ahead of the competition by automating.
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To your success 🙂
David Rivers
Join the NoLimits Business Community
Are you a business owner looking to take your business to the next level? Join our innovative community of like-minded professionals and gain access to a wealth of valuable resources, including a community portal to chat with other business owners, ebooks, business development software, and growth events that will transform the way you do business. Best of all, these resources are completely free and will be available to you forever.
But the benefits of joining our NoLimits business community don’t stop there. By becoming part of our community, you’ll have the opportunity to connect with other business owners, share insights and ideas, and build valuable relationships that will help your business thrive. Don’t miss out on this amazing opportunity to supercharge your business and join us today!