How SMEs can improve cash flow in the current economic climate

By Boost Business Lancashire

26 Jun 2024

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Cash flow relates to the cash and cash equivalents transferred in and out of your business. Positive cash flow is when you have more cash coming into your business than you have going out and negative cash flow is the opposite. 

If your business has negative cash flow for a sustained period, it can become difficult to fund the necessary day-to-day operations in your business. However, managing cash flow is one of the key challenges for SMEs, particularly in the current economic climate of volatile costs.

Mark Gibbons, Access to Finance – lead adviser, outlines five ways to help SME business leaders tackle cash flow issues: 

1. Diversify revenue streams

Relying solely on one revenue source can be risky. SME business leaders should explore diversifying their income streams. This may involve offering new products or services, targeting different customers, or expanding into new markets and regions where appropriate. 

Diversifying can reduce an SME’s dependence on a single source of income and mitigate cash flow fluctuations. It improves the chance of maintaining profitability no matter what market conditions the business may be facing.

2. Adopt effective expense management

Keeping tabs on expenses is crucial. SME business leaders should regularly review their costs and identify areas where they can cut unnecessary spending. Negotiating better terms with suppliers and creditors, improving inventory management, and reducing overhead costs can all contribute to better cash flow management.

It is also important to adopt an effective employee expense policy, so employees understand the rules and which expense claims are reimbursable, and to ensure that expenses are kept to a minimum. 

With a control on compliance and company costs, cash going out of the business can be more accurately forecasted in future cash flow planning.

3. Improve cash flow forecasting

Accurate cash flow forecasting enables businesses to anticipate cash shortages or surpluses. By analysing historical data and considering upcoming expenses and revenue, SME businesses can create realistic cash flow projections. This will help to plan and take proactive measures to address any shortfalls.

Cash flow planning includes estimating the likely sales within the period of the forecast. This may include seasonal patterns that can be reviewed from past reports or peaks during advertising and marketing campaigns.

Once likely sales have been estimated, the expected payment period for these goods and services needs to be determined. Being realistic about when payments will be made is critical, as it is highly likely that late payments will be received, so factor this into the forecast.

Cash flow forecasts also needs to include fixed and variable costs during the forecasted period including rent, lease of equipment, salaries, membership fees and tax payments. Variable costs will include payment of stock and raw materials and delivery and shipment costs, which can fluctuate frequently.

When creating a cash flow forecast, it is important to continually review it and keep it up to date.

4. Manage your billing carefully

Billing management is a critical part of any SME’s financial operations. The process encompasses the whole revenue cycle of the firm from the initial pricing and quoting for the delivery of products and services to the final payment of a bill from the customers.

Timely invoicing and effective follow-ups are critical. SMEs should send out invoices promptly and have a system for tracking payments. Offering incentives for early payments or penalties for late payments can encourage clients to settle invoices on time.

Here is a list of the processes behind better billing:

  • Planning and setting up the billing process for the business
  • Organising the billing structure including customer accounts, product information and supplier details
  • Creating and sending out invoices on time
  • Tracking payments and dealing with late payments
  • Maintaining accurate financial records and producing financial reports

5. Access external finance wisely

Sometimes external financing is necessary for growth. SMEs should explore options such as business loans, lines of credit, or invoice financing. However, they should carefully assess the terms, interest rates, and repayment schedules to ensure they don’t exacerbate cash flow challenges. 

Just because an offer of funding is on the table, it does not mean that it is the right solution to cash flow issues.

Each SME’s situation is unique, so it’s important to put together bespoke strategies to fit specific business needs. Perhaps, by implementing a combination of these approaches, SMEs can manage their cash flow better.

About the author

Mark has over 15 years of commercial lending experience supporting SMEs ranging from startup funding to asset-based working capital facilities and equity investment.

As the lead adviser of the Access to Finance service in Lancashire, Mark provides business support to businesses in Lancashire seeking to grow and raise finance. The fully funded service offers free and impartial advice on a range of funding options across the finance landscape.

The Access to Finance service is for ambitious businesses with desire to grow, invest, create jobs and / or innovate and trade internationally. Whether you are looking to secure investment, seeking a loan or planning an acquisition, our team can help.

Boost’s Access to Finance service recently launched a new Investment Academy designed to help businesses better understand how to secure equity investment. Those who are interested in the Investment Academy are invited to an online launch event on July 10. It will include an overview of the current business finance landscape, further details about the Academy and give eligible businesses the opportunity to submit expressions of interest.

To contact the Access to Finance team or to register to join the Investment Academy online launch, call the Boost helpdesk on 0800 488 0057.

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