How small businesses can manage their cash flow effectively

Peak trading periods, such as Christmas, can often bring a welcome increase in sales, but they do not always guarantee consistent cash flow.

For many small businesses, periods of high activity can be followed by quieter months that place pressure on finances.

Cash flow is important to the success of every small business and determines whether you can pay suppliers, meet payroll, invest in growth and respond to unexpected challenges.

Even profitable businesses can struggle if cash flow is poorly managed and it is one of the most common reasons that lead to insolvency.

Why does cash flow matter?

Secure cash flow can allow a business to meet its financial obligations, using incoming funds to cover regular costs such as rent, wages, utilities and tax liabilities.

When cash flow is positive, businesses have greater flexibility to invest and take advantage of growth opportunities.

However, when cash flow is under pressure, businesses may be forced to rely on short-term borrowing or delay payments, which can put their plans on hold.

If cash flow concerns are left unaddressed, they can escalate and even lead to insolvency in some cases.

What are common cash flow challenges?

The Federation of Small Business found that 37 per cent of small firms faced cash flow difficulties due to late payments, while 30 per cent of small businesses resorted to an overdraft and 20 per cent experienced a slowdown in profit growth.

This stresses the importance of business owners to keep up to date with their current finances and what they are owed and to not spend more than they are earning.

Growing businesses can struggle more with cash flow management as expansion often requires investing in more staff and equipment before income is received.

It can even take just one or two late payments for cash flow to become stretched and affect your business’s ability to meet its own commitments.

How to improve your cash flow?

One of the most effective ways to manage your cash flow is to improve your invoice and debt collection services.

Invoices should be issued promptly and include clear payment terms. If these terms are not met, then a policy should be in place to collect overdue invoices and debts.

Many businesses may find that using software can help automate invoices and reminders and additional payment methods can help reduce the risk of non-payment.

This can create a fair collection process and help business find the balance between protecting their financial interests and maintaining a positive customer relationship.

Creating a cash flow forecast can also help you track funds and expenses, identify any shortfalls in advance and budget accordingly.

During the quieter months, small businesses must assess where non-essential costs can be cut to ease pressure on cash reserves.

Some businesses may benefit from external finance, such as invoice finance or an overdraft facility, to help manage cash flow gaps better and deal with longer customer repayment terms.

How can we support your cash flow management?

Cash flow can make or break a small business, but early financial advice can help you set up systems and make informed decisions.

Small businesses should try to prevent cash flow issues from arising and undertake due diligence on customers before lending and consider a deposit for riskier customers.

Our expert team can help strengthen your cash flow and build a cash flow reserve for when your business faces unexpected expenses or downturn.

With secure cash flow, small businesses can build resilience and support their long-term business goals.

For expert financial advice and support, contact our team today.

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