Why Effective Cashflow Management is essential for your Business

Understanding Cashflow
The Importance of Effective Cashflow Management for your Business
The Importance of Effective Cashflow Management for your Business

Whilst the lack of profitability is the largest cause of business insolvency in the long term, in the short term it is the inability to maintain a healthy level of cash flow that can provide the biggest headache for growing businesses. Cash flow is the lifeline of any business, and failure to keep a keen eye on the level of cash in the business can lead to a nasty shock when those bills arrive.

A working definition of cash flow

According to Investopedia, cash flow is the “revenue or expense stream that changes a cash account over a given period.” More simply put, cash flow describes the relationship between money entering and exiting the business. While it stands to reason that the more money coming into a business the better, the timing of incoming payments is just as crucial to a company’s financial health.

Why you need more than healthy profit margins

You might think excellent turnover and healthy margins are all you need for long-term business success, and they’re certainly going to be a huge help, but it’s also essential to ensure your gross profit level is sufficient to cover your overheads. Your ability to break even every month is going to keep your creditors happy and the insolvency practitioners at bay, allowing you to focus on growing your business.

What is the likely outcome if you fail to control your cash flow?

The inability to maintain a healthy level of cash flow is the most common reason small businesses fail. If you operate as a limited company, at least you have personal liability protection from mounting business debts, but as a sole trader, you alone are responsible and personal bankruptcy is a real risk.

The scourge of late payments

The burden of late payments on small and medium-sized UK enterprises recently reached a record high of £40bn. Unfortunately, many large corporations are putting the very survival of their suppliers at risk by exceeding the payment terms included on invoices by up to 90 days. Recent research has shown that a third of SMEs are spending an estimated £500 a month as a consequence of late payments in the form of overdraft and administrative fees.

The importance of pursuing overdue payments

You must be strict with credit limits and the payment terms you offer debtors. It is understandable that smaller businesses are hesitant to chase larger companies for payment at the risk of becoming a ‘nuisance’, but set out your stall from the off. Get your invoices out on time, resolve any disputes quickly and chase payments whenever necessary. The longer a debt is outstanding, the less likely you are to get paid, so act now.

Top Tips for Cash flow advice

Here are some top tips to keep your cash-flow in the best possible shape:

1. Make sure you manage the invoices effectively and if you don’t have the staff then outsource the requirement. Effective credit control is the lifeblood of your company.
2. Do credit checks on companies you are dealing with this s not too expensive nowadays so take advantage of the facility.
3. Invoice discounting and invoice trading can make a dramatic improvement on your cash-flow. If you are a smaller business stay clear of factoring as this may make matters worse if you are not clear on what you are doing.
4. Don’t put all your eggs in one basket – spread your risks of not getting paid by having multiple customers in varied sectors as much as is practical. If you are dealing with one or two large customers then you are increasing the risks to your business.
5. Know what your fixed overheads and what your outlays are going to be in advance via a well thought out cash-flow forecast.

For more assistance please do not hesitate to contact our experienced team of turnaround practitioners. Email: info@companydebt.com or call 08000 746 757 for a discussion of your circumstances.

Written by: Mike Smith

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