Cash flow management can be the difference between success and failure

No matter what you sell, whether it’s products or services, cash flow management can be the difference between success and failure. But while staying out of the red may be a priority, late or non-payments from customers could seriously damage your finances – impacting your ability to pay suppliers and secure credit.

Reducing the risk of any cash flow problems is fundamental to all businesses. Yet now, with the difficulties that the Covid-19 pandemic brings, even your most reliable customers may struggle to pay on time and in full. This guide shows you how cash flow analysis can help you meet your payments and grow your business, even during uncertain times.

“Maintaining a healthy cash flow is vital for SMEs, it’s the lifeblood of the business.”

What does cash flow management mean?

Cash flow management means tracking the money coming into your business and monitoring it against outgoings such as bills, salaries and property costs. When done well, it gives you a complete picture of cost versus revenue and ensures you have enough funds to pay your bills whilst also making a profit.

By understanding your cash flow you’ll be able to forecast company profits more accurately and identify opportunities for investment.

Regardless of how much work you have in the pipeline, unpaid invoices from customers can lead to a black hole that cannot be filled simply by increasing revenue.

Avoiding cash flow problems doesn’t need to be complicated, but it’s absolutely key to the success and indeed survival of your business.

Why bad cash flow management is bad news for SMEs

All business owners will want to avoid cash flow problems. However, due to their size and ability to access financial resources, SMEs are often disproportionately affected by negative cash flow.

Where a larger business may have funds available as a stop-gap between late payments, smaller businesses rely more closely on their predicted monthly income to ensure their financial commitments are met. In serious cases, business owners can be left with no choice but to use personal funds to keep their business afloat.

For ambitious businesses looking to grow, long term negative cash flow can put these plans on hold. Instead of investing time and energy into thriving, business owners will be left scrambling to stay afloat month by month. It’s no wonder that research by QuickBooks found that 71% of small business owners have lost sleep worrying about the cash flow of their business.

According to one report, small businesses in the UK are owed on average £6,142. Not surprisingly, late payments can also impact your mental health, with more than a quarter of small business owners saying they worry about late payments when not at work. Researchers found that 17% say payment delays undermine their confidence to run a business, while 16% worry about the issue every working day.

One way to maintain positive cash flow is running regular credit checks on your client and suppliers. Before entering into any contract, tools such as Experian Business Express can show you their business credit rating, highlighting any warning signs early on. Importantly, you can also run credit checks on existing customers to see whether they are experiencing financial difficulties that puts your business at risk.

Check any company or business with Experian Business Express credit reports

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How to know when it’s time to improve your cash flow

Without a proper understanding of what cash flow is, it’s easy to miss early signifiers of potential cash flow problems.

There are a number of common signs that your business may be soon facing financial difficulties – but they will only become clear once you’ve created a budget, set clear cash flow targets and are on top of your reporting. But what are the warning signs to look for?

Your business is making late or missed payments

If you notice that your unpaid invoices are starting to pile up, then you might have a cash flow problem. But even with automatic reminders set up, it’s impossible to pay your business bills if the cash just isn’t available. Whether late or missed payments are down to poor admin or no cash, they can result in a low business credit score, impacting your ability to secure finance, find suppliers and build partnerships.

You have a negative cash flow

While many business owners keep a close eye on cash flow, a sudden financial shock – like a client going out of business or machinery breaking down – can quickly put you in the red. Once this happens, it’s very difficult to increase your revenue quickly enough to cover your costs. It’s therefore vital that you take as many preventative steps as possible, so you’re prepared for anything. Just as important as monitoring customers’ credit scores is monitoring your business’ own credit score using My Business Profile. If your own finances are robust, you should be able to secure cash flow loans or finance for new equipment.

You’re missing discounts on accounts payable

Many vendors offer early payment discounts, helping to ensure their own cash flow health and giving you a financial advantage. If you’re paying most accounts payable in full and missing out on these discounts, you may be setting yourself at a disadvantage which could lead to a cash flow problem.

You’re constantly juggling funds around to cover costs

With a positive cash flow, managing your costs will be simple. You’ll know exactly what is coming in and when, so you can set up payment terms on your outgoings that won’t be missed. It’s time to improve your cash flow if it’s a monthly struggle to keep up with your financial obligations.

The three ‘pillars’ of cash flow management

We’ve mentioned before that cash flow management doesn’t need to be complicated. In fact, it can be summarised by three ‘pillars’.

Pillar 1: How much money you’re generating

Every business wants to generate more revenue, but it pays to be strategic. Think about your pricing, promotions and whether you could diversify into other markets.

Concentrate on improving the quality of your product or service too, and invest in marketing and customer service to build brand loyalty with existing clients. With a high customer turnover your income could vary greatly each month, while businesses with returning trade can forecast more accurately.

Pillar 2: How much money you’re being paid

Generating more income isn’t effective unless your business is actually receiving the funds for its services. Make use of credit checking services, such as Experian Business Express, to reduce your financial risk before entering into any new professional relationships.

Send invoices promptly and automate late payment chasers to increase the chances of early payment, and don’t be scared to enforce late payment penalties too.

Pillar 3: How much money you’re spending

If you rent office space or other premises, negotiate better rates with your landlord and other suppliers. Printing, travel, utilities and so on all add up, so always shop around and make sure you’re getting the most competitive rates.

cashflow-generating cashflow-paid cashflow-spending
Pillar 1
How much money you’re generating
Pillar 2
How much money you’re being paid
Pillar 3
How much money you’re spending


10 ways to boost your cash flow management

These three ‘pillars’ of cash flow analysis can be used to inform a positive cash flow plan. Below are 10 simple tools for SMEs that help to tackle some of the cash flow problems a business might experience.

1. Set a budget

This is the foundation of any enterprise. Carefully log your business’ expected earnings and outgoings to understand your budget before making any big financial decisions. By doing this you can easily see whether your cash flow is predicted to be positive or negative and can adapt your plans accordingly.

2. Keep records

It’s important to create an efficient reporting system for your businesses records – which supports compliance and your credit rating.

Tracking your business against your own historic performance and industry competitors will also help to give a wider understanding of your projected cash flow.

Below is an example of the types of documents and data you should log and review regularly:

  • Income
  • Uncollected cash
  • Monies owed
  • Regular expenses
  • Available cash
  • Inventory
  • Individual revenue streams – which are making a profit, which are struggling
  • Gross profit
  • Net profit

3. Review your spending regularly

Business expenses can soon build up, particularly as you grow and hire more staff. Keep in control of your finances and take regular audits to learn exactly how much you’re spending and how much income you need to cover the costs. Some key areas to focus on include:

  • Energy bills
  • Paper and printing
  • Travel
  • Technical systems and equipment
What did 2020 teach us

4. Credit control

This simply means putting processes in place to ensure that you’re paid on time and in full. A robust credit control system is vital to maintaining a healthy cash flow, speeding up the rate that any monies owed is received and reducing the risk of late payments.

A good credit control process is based around a number of factors, including:

  • Clients: It’s not uncommon to do your due diligence on potential new clients before welcoming them onto your books. Tools such as Experian Business Express can run fast credit checks on any company, identifying clients that are likely to pay on time, and those who pose a greater financial risk.
  • Clear payment terms: Just as you’re likely to have agreed on abiding by late payment fees for any invoices you receive, you can also set up your own expectations for any clients and suppliers to agree to. Make it clear how much you expect to be paid, by when and what the consequences are if the funds aren’t transferred on time, or at all. Where possible, create payment plans for large purchases with regular, smaller installments. As well as making these larger investments seem more viable for clients, formal payment plans help you to forecast your finances, rather than receiving sporadic lump sums. Always send your invoices on time and use online systems or other simple methods to make payment convenient, rather than a task people avoid.

5. Staff training

Credit control systems are only effective when finance staff are fully trained on the importance of payments.

Beyond this level of direct financial training, keeping staff well-skilled in their area of expertise can also help to drive efficiency and lower costs for your business overall.

6. Diversify your revenue streams

Operating with a diverse product range can help to grow more revenue streams and reduce your financial risk. Businesses with just one revenue stream can quickly fail if their chosen industry or offering hits financial problems. Food, fashion and interior design, in particular, see short-lived trends – the question is, how can you make the most of them without falling behind as they change?

7. Make use of technology

Whether you’re a SME owner with no accounting experience or a finance specialist, there’s plenty of cash flow software available to make your processes more efficient. As well as offering improved accuracy, using app or internet-based tools makes it simple for you and your staff to log on and send invoices from any location. If you’re looking for help on choosing the right software for your business, read our guide which contains top tips on how to find the right business management tools for your business.

8. Maintain good business relationships

Tensions can rise when dealing with business finances but maintaining good relationships can help build positive cash flow in the long run. Suppliers, lenders and clients are integral to a healthy cash flow, and by keeping on good terms it increases the likelihood of payments being made on time, or for flexible terms to be negotiated when needed.

9. Know the warning signs

As mentioned previously, you need to be able to spot early warning signs such as a recent drop in a customers’ credit score. Acting fast can reduce the chances of any repercussions, such as a lower credit score for your own business or damage to your reputation if you can’t meet your own payments.

10. Make use of the help available when you need it

Like a small crack on a piece of glass, if you notice a slight cash flow problem it’s crucial to address it as soon as it appears, rather than allowing it to become a make or break moment for your business. Work with your bank, accountant and financial advisor to get the support you need.
Understanding how to manage cash flow might seem difficult but with insights and informed forecasting, you can reduce your chances of storing up future problems.