Managing cash flow is a critical element of running a successful small or medium-sized enterprise (SME).
In fact, the often-quoted statistic that most new businesses fail within their first few years can usually be attributed to poor cash flow management.
To help your SME navigate through the financial complexities, here’s a comprehensive guide to cash flow management.
What is cash flow?
Cash flow refers to the movement of money in and out of your business.
Positive cash flow means that more money is coming in through sales, loans, or other forms of revenue than is going out through expenses.
Alternatively, negative cash flow indicates that the business is spending more than it’s earning, which can be a serious problem if sustained.
Why is cash flow management important?
Cash flow is essential for covering operating costs, purchasing inventory, paying employees, and ultimately ensuring the sustainability and growth of your business.
Poor cash flow management can lead to a business’s downfall, regardless of how good the business idea may be.
Key steps for effective cash flow management
1. Develop a cash flow forecast
Projecting your cash flow helps you anticipate periods of tight liquidity. Most businesses experience seasonal highs and lows, so understanding these can help you prepare.
You can use accounting software to track historical data and make realistic projections.
2. Maintain a cash reserve
Always keep a buffer for unforeseen circumstances; economic downturns, pandemics, and other unforeseeable events can significantly impact your cash flow.
A cash reserve offers a safety net during hard times.
3. Invoice promptly and accurately
Ensure that all invoices are sent out on time and are accurate, as late invoicing can lead to delayed payments, affecting your cash flow.
To help with this, you could incentivise clients to pay early by offering discounts or other benefits.
4. Monitor receivables
Always know who owes you money, how much they owe, and when it’s due, and act promptly on overdue accounts.
The longer the invoice goes unpaid, the greater the risk you run of never receiving the money.
5. Extend payables (wisely)
While it’s essential to pay your own bills on time, extending payables can be a strategic move. This doesn’t mean delaying payments dishonestly, but instead negotiating better terms with suppliers.
6. Cut unnecessary costs
Regularly review your expenses and cut back on unnecessary costs.
Whether it’s a subscription you no longer need or renegotiating vendor contracts, every pound you save can help your business’ finances.
7. Explore financing options
If your SME experiences significant growth or needs to make substantial upfront investments, consider external funding options such as bank loans, grants, or venture capital.
8. Reinvest wisely
If you have extra cash, consider reinvesting in business growth.
However, you should ensure that any investment provides a solid return and doesn’t endanger your cash flow.
Cash flow management is undoubtedly one of the most important business operations. If you would like guidance on how to manage cash flow for your SME, please contact us today.
