Good cash flow is fundamental for businesses to survive and grow. In fact, it’s more important than profit as it supports day-to-day trade whilst also providing a strong foundation for business development
When cash flow is positive, more cash enters the business than leaves it, and the reverse is true for negative cash flow. It’s important, therefore, to have as much control as possible so you have ample working capital to reach your goals.
So how can you make sure that cash flow is healthy and underpins your business even when trade is slow? Shaun Barton, partner at Company Closure, discusses below.
How to boost your small business cash flow
Putting cash aside when you can is one way to build a reserve of working capital for use during leaner months. If your business isn’t currently generating spare cash, however, here are seven ways to boost your cash flow and accelerate business growth.
Cash flow forecasting
You can reduce the risk of negative cash flow by forecasting your cash needs over several months to a year or more. In brief, you take the current cash balance, input your prospective income for each month, and deduct your likely outgoings.
You should factor in external elements that could affect business, such as inflation or new competitors in your market. It’s also important to consider seasonal changes so you can build up a cash reserve for quieter trading periods.
Using forecasting software you gain a vital understanding of your business’ cash needs. You can also keep track of how much it costs to build your product or provide your service, which guides you to your optimum price point.
Effective credit control and debt collection
Controlling customer credit limits protects your business from bad debt. It’s also good practice to regularly credit-check your existing customers in addition to new ones, as supplier businesses could decline quickly without you necessarily being aware.
Collecting in your own debts efficiently is also vital to boosting cash flow. For example:
- Sending out accurate invoices as soon as work is complete
- Being clear on your payment terms, and including them in customer documentation
- Following up quickly if payments are late
Stock control
If you purchase too much stock and it doesn’t sell, it can severely compromise working capital availability so it’s a good idea to develop a management system for inventory. You might also decide to cut back on low-selling products to reduce cash outlay. Inventory software can help you manage your stock by setting minimum product limits.
Increasing profit margins
You can increase your profit margins in various ways, including raising the profile of your best-selling products. Knowing which your best sellers are means you can promote these and avoid having to mark down products that are slow to sell.
Upselling and cross-selling are other effective ways to increase profit margins. When you’ve already attracted a customer, using the opportunity to increase their order value is a far less costly marketing strategy than constantly looking for new custom.
Cutting outgoings
By regularly analysing your business spending and cutting back where you can you reduce the drain on working capital and boost cash availability – consider any expenditure that was once necessary but is no longer required, for example.
If there isn’t a specific area that you can cut back on, even a small percentage reduction in business expenses across the board can make a noticeable difference and boost your cash flow.
Offering easy payment methods
If customers have clear and straightforward payment methods it makes it easy for them to pay you. This typically involves offering online or digital payment methods, such as card payments, PayPal, and bank transfers.
You should also ensure all the information they need to pay you is clearly visible on the invoice and that the costs presented to them match their own expectations on the product price and quality of service.
Considering alternative finance
Alternative finance options, such as invoice finance, offer flexibility as well as vital support for working capital. Invoice factoring is a particularly good option for boosting cash flow as it provides a regular input of cash throughout each month using the value locked inside your sales ledger.
Factoring companies can also take over your credit control and relieve the pressure of chasing payments, freeing up time to attract more sales, for example, or offer standout customer service.
The importance of boosting cash flow in your business
With economic uncertainty comes a risk for smaller businesses of slipping into financial decline. It might only take the loss of one customer to drain any cash reserves you’ve accumulated and compromise financial stability.
Essentially, boosting cash flow protects your business from financial distress and gives you the freedom to make important business decisions with confidence.
This piece was written and provided by Shaun Barton, partner at Company Closure.
