Did you know that poor cash flow management is one of the leading causes of business failure? In fact, more than 80% of businesses fail due to a lack of cash, and 20% of small businesses fail within just 12 months.

Cash flow is crucial for the success and sustainability of all businesses. It measures how much money you’ve got coming in and going out and determines how well you can meet your financial obligations and goals. However, managing cash flow can be tricky, especially if you face unexpected challenges or struggle to keep up with your bookkeeping. Here, we’ve shared common signs of cash flow problems and ten helpful tips to boost cash flow and ensure your business maintains good financial health.

Red flags of poor cash flow

Poor cash flow can hurt your business performance and reputation. As we said above, it’s one of the leading causes of business failure. The best way to prevent poor cash flow from destroying your business is to spot it early. Here are the negative cash flow red flags to be looking out for:

• You’re spending more money each month than you’ve got coming in.
• Your business is making late payments to suppliers or missing them entirely.
• Your debtors don’t pay you on time.
• You’re struggling to pay your staff and meet other regular expenses.
• You have a high debt-to-equity ratio, meaning your business is not generating enough profit to service your debt.
• You lack cash flow controls and are not monitoring or measuring your cash flow performance against the right metrics.

If you find yourself nodding and identifying with these red flags, it’s time to act. Cash flow management is an ongoing process – not just something you think about when payroll or VAT is due. Use the 10 cash flow tips we’ve shared below to instil good bookkeeping habits in your business and create a strategy for survival.

1.     Create a detailed cash flow forecast

Begin your journey to better financial health by creating a detailed cash flow forecast for your business. Your cash flow forecast must pull together all the available data to determine your current income and expenses and how these are likely to change in the months ahead.

Start with your opening balance – the cash your business has available right now. Use financial data detailing your income and expenses for previous months to determine an estimate for the coming months (your chosen forecast period.) Remember to consider any key changes that may affect your business during the months ahead.

Creating a detailed cash flow forecast will help you anticipate potential cash flow problems and plan accordingly.

2.     Monitor cash flow reports

Unfortunately, it’s not as simple as creating a cash flow forecast and being done with it all. Monitoring cash flow is crucial to the success of your business, so you must create regular cash flow reports that are up-to-date with real-time information. Doing so will help you see where you’re spending money (so you can potentially cut costs), protect business relationships by ensuring funds are available to pay suppliers on time and guide you in growing your business at the right time, with enough cash for stock, premises, and employees.

Cash flow reports are also helpful in identifying trends and support you in making more informed decisions for the future.

3.     Set a budget and regularly review spending

Are you spending too much? Do you have unnecessary expenses? You won’t know unless you use your cash flow reports to review and audit spending regularly. Identify areas where you’re perhaps spending too much money and see if you can cut back. Perhaps you’re buying too much stock? Maybe you can renegotiate a contract or seek a more cost-effective alternative. Remember, you need to ensure you have enough cash to cover all your expenses, so any money (no matter how little) you can save will make a positive difference.

4.     Develop a cash reserve

Have you read the book ‘Profit First’ by Mike Michalowicz? If not, get it on your reading list. In ‘Profit First,’ Michalowicz introduces the idea of ‘The Vault,’ a separate account you can set up for your business to put aside money each month as a cash reserve. Michalowicz recommends working out your average monthly business costs and saving three times that amount in the vault. So, if something significantly affects your cash flow forecast, such as a client leaving you unexpectedly, you can tap into your cash reserve if necessary.

Setting aside a portion of your profits as a cash reserve to cover unexpected expenses or temporary cash flow disruptions is a fantastic idea and one, we’re totally on board with. However, we know that putting that much money aside is nearly impossible for many business owners. Instead, start small. You don’t need to suddenly magic up three times your monthly business costs to save. Any money you can put aside will make you better off than before.

We also recommend prioritising putting money aside for tax obligations like Self-Assessment, Corporation Tax and VAT. Establishing this good habit will be crucial to the success of your business.

5.     Implement credit control

It’s wise to have controls that ensure customers/clients pay your invoices on time and in full. Creating clear payment terms that set out how much clients should pay you, when they should pay you, and what will happen if clients don’t pay is a good start.

Don’t be afraid to send payment reminders or late payment notifications out, either. Your customer or client may need a friendly nudge to pay their invoice. If you’re uncomfortable doing this yourself, why not consider using accounting software and setting up automatic payment reminders?

If you can afford to, offering early payment discounts might also be a good idea. This will incentivise timely settlements and help keep your cash flow in good order.

6.     Re-negotiate better payment terms with key suppliers

Improve your cash flow by negotiating better payment terms with your suppliers. Prioritise negotiating with suppliers you use most and ensure you’ve always paid them on time. Only pay invoices when they’re due – unless you can benefit from an early payment discount.

7.     Optimise your inventory management

Are you finding that cash is tied up in unsold stock? Monitor sales trends so you can adjust your inventory levels accordingly. Check your inventory to identify any products that aren’t selling well – these products potentially harm your cash flow, as they are not converting into revenue for your business. It might be worth selling off less popular products at a discounted price (and not buying additional stock) and investing more in the products that are a safe bet selling-wise.

8.     Identify business inefficiencies

Identifying bottlenecks in your business processes and inefficiencies can go a long way in boosting your cash flow. One area you could investigate is the time it takes to convert raw materials into finished products you sell for cash. Is there a way of optimising the process to make it more efficient?

It’s worth looking at your cost structure to spot efficiency gaps and increase savings. For example, outsourcing to a freelance worker, rather than hiring an employee, will prevent your business from needing to provide a salary and benefits.

9. Use cash flow software

In the age of ‘Make Tax Digital,’ your business is likely already keeping digital records for bookkeeping and accounting. However, aside from being a legal requirement for all VAT-registered businesses to keep digital records, it’s beneficial to all businesses and can help support healthy cash flow.

Cloud-based accounting software will help you keep track of your income, money owed, regular expenses, available cash, inventory, gross profit, net profit and more. Even if you don’t have any accounting experience, it will make managing cash flow easy, enabling you to benefit from improved accuracy with real-time data, plus the flexibility of sending invoices and monitoring cash flow from any location.

Are you wondering where to start with cloud-based accounting? Feel free to get in touch with our experienced hybrid accounting team. We provide cloud-based accounting software training to increase your confidence in keeping digital records and help ensure you get the most out of your investment.

10. Hire an accountant for cash flow improvements

There are many reasons why your business needs a hybrid accountant, and one of the most important is to improve cash flow.

Throughout this article, we’ve highlighted the importance of good cash flow management with forecasting and reports. While you can do it yourself, many busy business owners prefer leaving it to the experts.

Hiring or outsourcing cash flow reporting to a hybrid account will save you significant time and allow you to benefit from their expertise. Along with creating and monitoring cash flow reports and forecasts, a hybrid accountant can also help to achieve positive cash flow by:

• Identifying and reducing your business expenses
• Optimising tax relief
• Highlighting additional funding sources
• Improving financial forecasting and tax planning
• Detecting cash flow problems early to find solutions quicker
• Establishing good bookkeeping and accounting habits

If you’re ready to leave poor cash flow in the past and go from merely surviving to thriving, it’s time to get in touch with Kale Accountancy. Book a free 30-minute consultation to discuss your business and learn how we can support you with improving cash flow.