Four Practical Ways To Manage Cash Flow For Your Business

Updated: Jun 19, 2018

The biggest killer to any UK business is when it runs out of money. Often, it's not because of a bad product, poor service, or even the economy, but lack of cash flow. It takes experience to understand how to manage cash flow well.

1. Build income up when you’re doing well so you can use it in in a down turn.

When you’re a new business or even if you’re well developed, cash in your business remains king. You never know when you might run out of it or require some for a particular business need.

Building your income and notably your cash position up when you’re doing well is important so that should there ever be a downturn in business, economic or seasonal, you can use your cash reserves to make it through the leaner months.

2. Create a budget and stick to it.

This is so important to do, especially when you’re a fledgling business. You need to know how much your business needs to survive with growth and then ensure you don’t waver between those set lines. When you’re of a much bigger size with more money coming into your business, again, it’s just as important to ensure budgets are set and met to prevent cash leakage. It’s very easy for businesses who turnover a high amount of money to not spot the small trickles escaping through holes in your day-to-day accounts.

Of course, there is give and take, but don’t spend over your budgeted targets as then you will fall into a cash flow problem that you might not be able to get yourself out of, without the help from overdraft, loan and other banking facilities that will impact the financial foundations of your business.

3. Start small, DIY and hire based on aligned vision.

If you’re just starting out, it’s essential not to hire too quickly. Overheads such as staff and rent can spiral out of control extremely quickly and the last thing you then want to do is backtrack with time-consuming redundancies. Do as much as possible yourself to start with and then look to hire suitable people who believe in your vision and goals and with those that you can utilise across multiple areas of your business.

Getting as much out of your staff as possible is crucial and capacity management is one of the hardest elements of business employment a company can get right no matter if they’re a startup or a seasoned company. Hire those who are the best for the job and field, manage them (not micro-manage!) by setting goals, track those targets weekly and step away to concentrate on the business-running elements that you’re best at. Your overall business will feel much happier and healthier as a result.

4. Know your numbers and manage your money

Not knowing your numbers is the main reason businesses run out of money. Know your main KPIs (key performance indicators) and monitor them to accurately gauge how well you’re doing. Ensure you are aware of your COGs (cost of goods sold) and fixed costs as this will directly impact your gross-profit and your crucial net profit. DO NOT just look at your turnover and think you’re doing well as that is just ignorant vanity.

Manage clients, ensure invoices are paid on-time in line with your payment terms to lower your risk of poor cash in your business. Also establish healthier payment terms with your suppliers so you can stretch your cash as much as possible. Credit control, debtors and cashflow management are absolutely do-or-die processes of your business.

Use a cash flow tool such as a spreadsheet or a cloud platform (Float with Xero is what we’d recommend) on a weekly basis to help you to monitor cash flow and will allow you to make firm factual decisions based on what needs to be paid off that week over what can be pushed.

Have a good relationship with your bank and establish an overdraft that you can dip in and out of every month to ease the cash in and out of your business as it acts as a line of credit.

We would also highly recommend contracting a management accountant who can help you along your cashflow management journey and really allow you to dive into this field with an expert to explain and guide you.

Pay your bills and liabilities on-time and if you can’t, be honest and agree repayment plans with suppliers and the HMRC for good cashflow management and then ensure to meet the payment plan schedules. If you are VAT registered, putting your VAT away into a separate bank deposit account is a good idea for your quarterly commitments.

Finally, pay yourself first. If you can pay your personal mortgage, keep you and your family financially happy, this will attract a self-worth and self-starting attitude. Poverty however will lead to anxiety, desperation, depression and the end to your business by feeling disenchanted and from making poor business decisions. When you are backed into a corner and especially when it comes to money, you get emotional, and you make bad decisions quickly. Being happy will make your business thrive.