Keep the cash flowing

Cash flow issues are the number one reason why businesses fail.  How can your SME keep on top of the finances so you don’t run out of accessible cash?

What causes cash flow problems?

Cash flow problems arise when the money spent is greater than that received. The causes are varied and include:

• Buying excess stock
• Seasonal fluctuation in sales
• Rapid expansion
• High overheads
• Late payments
• Forgetting to send invoices

Poor cash flow isn’t necessarily a sign of a failing business. A company may be profitable and have plentiful assets, but not have access to money to pay suppliers, employees or rent.

An Intuit Quickbooks report – The State of Small Business Cash Flow – revealed that 1 in 7 SME owners have been unable to pay wages on time due to cash flow issues. Their findings also revealed that only 66% of invoices were paid on time. That is, in accordance with the payment terms.

Some business owners relied on overdrafts and others on personal savings to keep their company afloat. 80% reported that cash flow issues caused them stress and late payments were identified as a reason why business growth was hindered.

There has been an added complication through the pandemic where SME lending surged from 10% to 25%. These loans have to be repaid, but many businesses are yet to return to normal trading. Debt repayment is impacting the balance sheets.

What are the solutions to cash flow problems?

The following 3 steps can help an SME to improve the chances of keeping finances in balance:

• Creating a cash flow plan
• Using an accounting system
• Updating your payment terms

Creating a cash flow plan

A cash flow plan helps you to identify when to invest and when to reign spending in.

To summarise the process:

• Note your current balance
• List upcoming payments and the due dates – deduct them from the balance
• List upcoming expenses – deduct them from the balance
• Identify income streams and due dates – add them to the balance

At the end of each week allocate time to reviewing the cash flow plan against reality. Have unexpected payments been received? Are late payments affecting the balance? Regularly reviewing the cash flow plan will help you to identify patterns, such as a client who always pays late. This insight can inform future financial planning.

Visit my template library for a downloadable cash flow template.

Using an accounting system

Small business owners have a lot on their plate and this makes it a challenge to keep up to speed with the finances. Accounting systems including Xero, Quickbooks, Freshbooks and Sage can make all the difference.

This is a case of using technology to aid efficiency. The system can be set up with branded documents, including invoices, reminders and chasing letters. These can be scheduled, so invoices are sent promptly and don’t slip through the net. Expense receipts can be added by scanning them on your phone, which helps to maintain an accurate, current financial picture.

Techradar has recently published their small business accounting software review, so you can see which best fits your business requirements.

As a document specialist, I have prepared branded financial documents and integrated them into business software for clients. If this is something you need, get in touch.

For other ideas on how to work less and increase productivity, check out my capacity blog!

Updating your payment terms

If late payments are a cause of cash flow issues, it is time to update your Payment terms.

• Consider whether introducing an upfront deposit or Payment in Advance (PIA) is viable.
• Can you reduce the payment due duration from Net 30 (30 days from invoice date) to End of Month (EOM) or Net 10?
• Are early payment incentives or late payment penalties an option?

Be sure to inform customers of your updated payment terms, especially those that have previously been late to pay.

Chasing late payments

Using accounting systems, you can schedule a reminder to be sent a few days after the invoice is due if it is unpaid. Sometimes this prompt is sufficient to ensure a transfer of funds. The next step might be a call – just a polite reminder that the invoice is outstanding.

If these approaches fail to work, the next step is to send out a late payment letter. Keep a note of all communication – these are evidence should the case go to court. The next step is to seek legal advice from a solicitor or specialist in debt recovery. They will present the options, inform you of the process and likely cost.

3 Steps to cash flow management

I trust that these 3 steps to cash flow management will maximise your access to funds and minimise the need to chase outstanding debt. With efficient procedures in place, you will be better equipped to achieve business success.