Cash Flow Management for Small Businesses

To be successful as a small business it’s not enough just to bring in money. Liquidity can make or break a business, and that’s especially true when that business is a small one. Cash flow keeps a business stable, and it’s often the first thing looked at if you’re every looking for investment.

Fundamentally, a business with healthy cash flow is more likely to be a viable business. And sometimes even a profitable business can still struggle to make payments by deadline and regularly has a low bank balance,

Here are a few steps you can take that should make that better.

Tighten Your Payment Cycle

If you’re not a shop, you’re almost certainly doing some of your work on credit, and any lag in your payment cycle can affect your cashflow even if you should be extremely profitable.

Your payment terms might be the standard 30 days or even stipulate payment in advance, but sometimes in the interests of maintaining good relations with a regular customer, a payment might be allowed to slip for a while from time to time.

Tighter payment controls and a more efficient dunning cycle can really improve the cashflow of a profitable business. Sad to say, sometimes this does eventually mean informing longstanding customers that their business is no longer sustainable unless bad payment habits are corrected; a poor payment cycle will reduce the profitability of a customer, and can even wipe it out if bad enough.

When the right time to do that is has to be handled on a case-by-case basis. Ultimately the lesson here is to know the real value of every customer.

Regular Accounts Reviews

And if you want to know the real value of your customers, there’s no substitute for being familiar with your books. You should be watching for any point where low cashflow affects your business, and keep track of whose payments are outstanding when that happens. If you notice a pattern, you’ll identify your biggest problem customers in real terms.

You’ll also have the data you need to be confident in your decisions. Often we’ve noticed that some clients have customers who started off by always paying on time and are still treated as completely reliable even after they’ve slipped, while other businesses are mentally flagged as unreliable when in real terms they’re much less of a problem.

Keep Tax Liabilities Clear

Should this be obvious? Yes. Are there enough complexities in tag regulations that it’s easy to think you have them clear while having missed something? Also yes. Not every small business has accountants in their corner (although we’re always happy to help) but especially if you don’t, thinking you need to budget more or less than you actually do for tax isn’t uncommon.

Make sure you’re aware of what changes to tax legislation will do to your tax bill, and keep an eye on the additional cost of a new hire in tax, National Insurance contributions, and pension schemes.

HMRC will usually be willing to work with businesses on payment plans where necessary but these do come with a substantial additional cost impact. If you don’t have the liquidity when the tax payment comes due, the impact is huge.

Factor a Buffer into Calculations

Probably the single best way to maintain a strong cashflow is to factor in a buffer at all times. Remember, it’s not just about the regular payments that come out every month; it’s about being able to handle a one-off investment when the opportunity arises or to replace key equipment in an emergency. With a ring-fenced buffer, you have more flexibility when you need it.

If you want any more help with this or other financial issues affecting small businesses, TR-W are always on hand for businesses in Lancaster and Morecambe. Get in touch today.