5 ways SMEs Can Keep Cash Flow Healthy


If you are at the helm of a small business or medium-sized enterprise, then you’ll know that cash flow is king. If you find yourself in the position of not being able to pay creditors, or defaulting on loans, your business could be in big trouble. It doesn’t matter how many orders or customers you have, your business can fail if you run out of cash.

Payments for overheads, such as premises and staff are essential. Most small businesses don’t have big cash reserves, so keeping cash flow healthy to keep up with your running costs is essential.

Here are 5 things small business must do to keep cash flow healthy:

1. Forecast your cash flow

Planning and budgeting are imperative for SMEs. Overstretch yourself financially and you could be jeopardising the future of your business. One of the biggest problems facing SMEs is having the experience to forecast cash flow with accuracy. It’s well worth investing in the help of a professional accountancy firm, such as Numeric Accounting, to help with any accounting issues, including cash flow forecasting. If you are confident, there are plenty of cash flow forecasting tools online.

Cash flow forecasting enables you to plan for any predicted tight spots in the future. If you know in advance that a cash flow problem is likely to arise, you may be able to put in place a short-term loan, or put money by if you have a cash surplus beforehand. Cash flow forecasts are only useful if they are based on realistic expectations. Monthly cash flow forecasting for the year ahead is the most common formula. You may want to produce two different forecasts – one optimistic forecast and a more pessimistic one. Remember, not everything will go to plan.

2. Keep tabs on costs

Keeping costs low is an essential ingredient for turning a profit. Cost inefficiencies are a common issue in SMEs, with a few people trying to manage multiple tasks. But, reviewing costs, even down to everyday things like printer paper, teabags, toilet roll and hand soap, could add up to considerable savings over the year.

Speak to your suppliers about costs, and try to improve credit terms with them. Ask your employees for ideas about reducing costs. Could you make efficiency savings with staff or premises? Are you wasting money on marketing? These are just some of the questions you need to continually ask yourself if you are serious about managing your costs.

3. Review products, services and prices

It’s important that you continually monitor and review your pricing strategy. Check in with your customers. Perhaps some of the things you offer to your customers are superfluous. Adapting your products or services to meet customer needs could in the long-term be a cost-saving exercise. Ensure you are pitching your price at the right level. You need to attract customers, but you also need to make a profit. You need to have a good understanding of your market and your competitors to keep prices at their optimum level.

Some businesses are reluctant to raise prices for fear of losing customers, but squeezing the margins could lead to cash flow problems, and could hurt your business in equal measure.

Try not to hold excess stock. This is money tied up that could be easing your cash flow.

4. Credit check customers and invest in credit control

Granting credit is one of the biggest problems for small businesses because it could have serious implications for cash flow. Always credit check customers who are seeking credit terms and limit the amount of credit you offer. Be clear on terms and ensure invoices are issued on time to reduce the likelihood of late payment. You need to have a robust credit control system to ensure your customers pay on time. Issue invoices in a timely manner, and send friendly reminders before invoices are due. If you find credit control difficult, outsourcing it could be an investment worth making.

5. Deal with cash flow problems immediately

The worst thing you can do if you encounter cash flow problems is to bury your head in the sand and pray. Doing nothing isn't going to solve the problem. In fact, doing nothing will more than likely make matters worse. There are a multitude of reasons your business may experience a cash flow problem, but whatever the cause you need to act quickly to avoid a catastrophe.

If you encounter a cash flow difficulty consider a traditional bank loan, a cash flow loan (more expensive than a traditional loan, but available quickly), a trade loan or invoice factoring - invoice discounters will loan you money based on a proportion of the outstanding value of invoices. You may also be able to temporarily extend credit terms with your suppliers.



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Wednesday, 17 July 2019
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