Cash Flow Tips for Small Businesses
Cash Flow Tips
If you run a small business, you probably have countless tasks vying for your attention and you’re continually stretched and pulled in all directions. In the fast-paced world of SMEs, maintaining a healthy cash flow is not just about numbers, it's a story of survival, growth, and strategic decisions. Here are some real-life stories and practical tips for your cash-flow.
Check our article in the latest edition of London Chamber of Commerce and Industry 's London Business Matters magazine or continue reading below.
Tech start-up
Picture John, the co-founder of a successful tech startup. Coming from a tech background he focused almost exclusively on delivering exceptional services to their customers, neglecting the financial side, so lots of those customers failed to pay on time and some of them failed to pay altogether. John learned the hard way that a robust cash-flow can make the difference between business success or failure.
He now keeps cash-flow on his priorities list. He had new systems implemented to ensure that customers are invoiced promptly and that invoices are chased diligently, twice a month. For slow paying customers their position is reviewed regularly, and incentives are offered for prompt payment, or the credit is rescinded.
For big projects, the contracts are now negotiated so that payment is done gradually after each stage of completion, ensuring a steady cash flow to pay his team and manage expenses.
Design consultancy
Emma, who runs a design consultancy, was growing her business at a rate of 30% year on year until she run into cashflow problems, despite her business being profitable.
Luckily for Emma, her accountant was there to foresee the cashflow problems. He helped her arrange a working capital loan for part of the needed cash. For the rest, they worked together to implement discounts for prompt payments from customers, a strategy that significantly improved her cash flow. Contracts with suppliers were re-negotiated for better terms wherever possible.
Open, positive communication with lenders and suppliers is crucial. They are integral to your operations and nurturing these relationships can lead to more favourable payment terms in the future or can even save your business.
Top Cash Flow Tips
Don't Delay Invoicing: Immediate invoicing post-service or product delivery is crucial. Delaying this can adversely affect your cash flow.
Maintain Supplier and Lender Relationships: Strong relationships can lead to better payment terms and easier access to finance. Neglecting these relationships can have the opposite effect, tightening your cash flow.
Consider Leasing Over Buying Assets: Leasing, rather than purchasing assets outright, can alleviate the burden of significant upfront payments. This approach frees up cash for other crucial business needs.
Inventory Management: Striking a balance in stock levels is key. Overstocking ties up cash and increases storage costs, while understocking risks losing sales. Regularly review your inventory to find that sweet spot.
Be Cautious with Payment Terms: Extending long payment terms without due diligence can be risky. Conduct credit checks and, where possible, negotiate for partial upfront payments.
Stay Tax-Savvy: Understanding taxes can save businesses from unexpected hits to their cash flow. Plan ahead for tax obligations, like corporation tax, which is due nine months after the year's end. This foresight prevents scrambling for funds when taxes are due.
Maximize Tax Reliefs: Don't overlook potential tax reliefs. For instance, small businesses employing staff might qualify for reductions in Employer National Insurance contributions. Additionally, research and development activities could make you eligible for tax credits.
Cash flow is the lifeline of your business, and managing it requires a blend of vigilance, strategy, and good relationships. These tips are not exhaustive but can help you improve your business’s financial footing as you navigate the challenges of growth.