Businessman turnimg tap - coins are falling out Owning a business is undoubtedly a rewarding experience – it allows you to set your goals and create tremendous financial opportunities, but it can also keep you awake at night especially if cash flow becomes an issue.

As experienced chartered accountants working with SMEs across London, we understand very well some of the trials you face when running your business. To protect your investment and maximise your business’s potential, it is essential that you have the right support and advice when it comes to tackling some of the challenges so you and your business can come out stronger. For the purposes of this article, we aim to discuss issues pertaining to cash flow and how to better manage it.

What is cash flow?

Cash flow is the total amount of money going into and coming out of a business. At any one time, your business should have more money coming in to cover everything that needs to be paid out. If the cash outflows are more than the cash inflows, then you have something called a cash flow gap – most businesses address this gap by relying on overdrafts to help them meet the obligations.

The good news is, cash flow is something that you can plan and control in advance with some guidance, meaning you can actually avoid cash flow gaps and maintain healthy business growth. Now let’s take a look at five tried and trusted methods to improve cash flow.

1. Always collect debts promptly

When it comes to collecting overdue money, many SME owners know the pain too well. According to research by Bacs Payment Schemes Limited in December 2018, more than a third of SMEs wait two months beyond agreed terms to be paid, making late payment a serious threat to the survival of SMEs.

To overcome this, it is crucial that you let your customers know your payment terms before both parties agree to work together. If you are offering a professional service, ask for part payment up-front and tie the remaining balance to each milestone, and make it clear that you won’t start the next phase unless the previous invoice is settled.

As soon as you become aware that certain clients still fail to pay despite knowing the payment terms, following up with phone calls and reissuing invoices will usually do the trick. If it becomes apparent that they don’t attempt the settle the payment soon, then it may be worthwhile to consider a debt-collecting agency. Speed is key to debt recovery – the longer you wait, chances are the more resources and effort will be required to recover payments.

2. Use an invoice template and accept multiple forms of payment

Although simple in theory, many SMEs neglect to make the payment process easier for their customers. Invoices addressing to the wrong customer, having an incorrect address or failing to include the issuing date and adequate bank details are common occurrences. One of our customers shared a story in which they tried for six months to get a vendor to issue a correct invoice – this may seem bizarre to those who keep a watchful eye on your accounts, but similar stories do happen daily due to all sorts of reasons. If you have already made use of an invoice template and the issue is largely because you lack a dedicated staff to properly manage this process, then consider outsourcing it.

For payment between businesses (B2B), bank transfer is the most common payment method and other payment methods like credit card, direct debit and Paypal are less so. Direct debit certainly deserves special mention as it reassures business owners that payments will come on time, so opting to accept direct debit and other forms of payment can help to cut down debt and maintain healthy cash flow.

3. Create accurate cash flow projections

It is essential for the longevity of your business to create accurate cash flow projections – an estimate of money you expect to flow in and out of your business, including all projected income and expenses. A cash flow forecast usually covers a year but you can also design it to cover a shorter period.

At Tax Agility, our small business accountants are experts in cash flow forecasts and we can help you to plan for multiple scenarios, accurately factor in fixed and variable costs, consider seasonality that may affect your business and put in place contingency plans, to name but a few.

An accurate cash flow forecast is invaluable because it gives you the visibility that you need to stay in control. For example, you know that you have to settle a major expense at the beginning of January and your clients are likely to miss payments in December due to the holiday season, then you can take pre-emptive actions like offering discounts to clients if they pay before the due dates, arrange for a short-term facility, or opt for invoice factoring (selling the invoices to a financial company at a discount for immediate cash injection).

4. Review your overheads

Business overheads are expenses that are related to the day-to-day running of your business and they do not correlate to a product sale or service. Overheads can include fixed monthly or annual costs, such as insurance, salaries and leases, or expenses that differ every month – repairs to your business’s building or advertising.

Typical overheads include:

  • Utilities – gas, water and electricity
  • Rent – the lease costs of the business premise
  • Administrative – salaries and office supplies
  • Insurance – which can include Property Insurance of General Liability Insurance
  • Maintenance and repair

By putting the overhead figures down in your cash flow forecast, you can see which areas (or when) you can cut down expenses or consider a cheaper alternative. In our post “Hiring specialist contractors can reduce SME costs”, we share good tips on how SMEs can optimise the use of resources and achieve maximum customer value, so follow the link to read more if you’d like.

5. Use an exceptional online accounting software

To stay on top of your finances, ditch cumbersome spreadsheets and opt for an easy-to-use online accounting software like Xero. Cloud-based accounting software Xero is built for small business owners who don’t necessarily possess a good level of accounting knowledge as its user-friendly interface makes it easy to understand key financial information.

The cash flow statement in Xero contains three useful sections:

  • Cash flows from operating activities such as salaries paid to employees, payment received from customers etc.
  • Cash flows from investing activities such as new office equipment or the sale of assets.
  • Cash flows from financial activities such as loan repayments, money invested in a business or money taken out by directors.

Xero allows you to customise the layout of your cash flow statement by dragging and dropping items on the interface, as well as showing more granular information like where you have spent cash. To make the most of it, it is best to discuss the cash flow statement with one of our chartered accountants so you can continue to make informed decisions.

Follow the link if you’d like to know more about Xero and how it can help to organise your business account and finance.

Tailored advice to improve your company cash flow

At Tax Agility, our small business accountants have built a strong reputation helping SMEs across London to build a robust set of business fundamentals including managing cash flow and using it to their advantages. If you’d like to know more about cash flow, tax and accounting matters, as well as statutory compliance, get in touch today on 020 8108 0090 or via our contact page to arrange a complimentary, no-obligation meeting.

This article was updated on 24/07/19

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This blog is a general summary. It should not replace professional advice tailored to your specific circumstance.