There’s a reason why, in the business world, cash is king. Reserves of hard currency give companies liquidity, which ensures they can pay employees, vendors, and suppliers, while still having a buffer should they find themselves in a sticky financial situation. However, over half of small businesses in the UK have encountered problems with their cash flow.
As a result, many startups are left vulnerable to financial disruption caused by scenarios like having to hold increased levels of inventory, upscaling, or low seasonal demand. This can threaten a business’s very existence, with cash flow problems being the downfall of just under a third of failing companies. The solution? Cash flow management. This prevents prolonged shortages, which are generally caused by big gaps between inflows and outflows.
Conduct cash flow projections
Performing cash flow projections enables you to predict potential problems ahead of time. By comparing your actual income and expenses with a detailed financial forecast, you can ascertain which areas of your business are over or underperforming, and take appropriate action. Doing this also helps you anticipate slow periods so that you can plan solutions, like taking out a loan. A cash flow forecast can be for the next year, the next quarter or, if you’re really struggling, the next week.
Start by calculating your sales forecast, which will require looking back through your sales history. To make future predictions, factor in seasonal patterns, and any plans that could affect your income. This could be new product launches or changes in your industry. Then, add in your payment timings, taking into account possible delays. Once you’ve worked out how much income you’re expecting to make—and when you’re expecting to make it—work out your outgoings. Consider fixed costs like rent, salaries, bills, and variable costs, such as raw materials, which are typically dependent on sales.
In order to simplify the process, it’s advisable to use forecasting software, which analyses imported business data to help you produce forecasting reports. Using these tools is much simpler and quicker than manually entering the information into spreadsheets yourself. Meanwhile, enterprise resource planning software (ERP) can make day-to-day cash flow management a lot easier. Take SAP S/4HANA’s Cash Operations function, for example. By importing data from bank statements, you can manage cash flow from one central hub. SAP S/4HANA also allows you to approve and monitor payments, categorise cash flows, and implement cash pooling strategies, all of which make it easier to take control of your business’s finances.
Speed up the receivables process
If businesses received money the moment they made a sale, cash flow problems would be a lot less common. Unfortunately, this is not how things work. However, you can make your cash flow management more efficient by speeding up your receivables process, as obtaining money quicker speeds up your cash conversion cycle and prevents lengthy stretches of time without cash.
One tactic is to offer discounts to customers who pay you early. Say your normal payment terms are 30 days, you could give customers a 2% discount on their invoice should they pay you within ten days. While you’ll lose what you discount, your improved liquidity should offset this. Other methods you could employ include sending out invoices more quickly and following up immediately should customers dawdle, and charging interest on slow payers. You may also want to vet new customers more carefully through the use of credit checks.
Better manage your payables
It’s also vital that you better manage your outgoing expenses. Top-line sales growth can often lull businesses into a false sense of security, and many take this as an opportunity to expand their sales to improve cash flow, rather than examine their expenses. Don’t let the way you pay others put your business in trouble, but instead consider cutting or controlling your payables.
For example, you’d be wise to make the most out of your creditor’s payment conditions. If they demand payment within 30 days, don’t pay them earlier than is necessary. This allows you to retain these funds for as long as possible, reducing the risk of cash flow problems. You should also always be sure to weigh up discount offers for early payments from vendors. While they can help you reduce costs overall, the extra time without this cash could prove problematic. Finally, when scouting out new suppliers, don’t always go for the cheapest option. Sometimes, it can be better to opt for those with more flexible payment conditions.