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Cash Flow Management: A Quick Guide for SMEs & Startups

Monitoring cash flow is a core part of running a business. It's not something you can afford to put on the backburner – but frankly, it can be a pain, distracting you from your real passion. 

Cash flow doesn’t have to be tricky and understanding it is vital for the success of your business. Unsurprisingly, cash flow is a universal problem, with 61% of small businesses experiencing cash flow issues on a regular basis. 

So we’ve asked our friends at Futrli, who offer AI-powered cash flow software, to share some of their best advice on cash flow management for SMEs and startups.

We’re going to walk through the most common causes of confusion for small businesses, starting with a common misunderstanding...

What is the difference between profit and cash flow?

You're making a profit, but you have no cash. 'What could be going on here?' you think. Let's look at a simple example:

Imagine you’re a contractor and you do a $10,000 job. You've spent $4,000 on materials to complete the job. So, this month, despite completing the big job, you’ve spent $4,000 and not received any cash in.

But, your profit calculations count the invoice as income despite it not having been paid yet, so your profit for the month is $10,000-$4,000=$6,000. This will not reflect in your cash flow until the invoice is actually paid which in most cases, is likely to be the following month. Being able to account and run your business to this lag is vital. 

The phrase “Turnover is Vanity, Profit is Sanity but Cash is Reality” springs to mind!

Cash is the amount of money a business has access to in real-time: money in hand, petty cash and the totals of any bank accounts. This is the net sum of your cash flow: the discrepancy between what’s coming in and what’s going out (again, remember this can be a negative value).

Profit is the financial gain (or loss) that comes from a business’s operations. Profit does not take into account whether a sale was made in cash or on credit. So, profit does not reflect the ‘real’ amount of money a business has. They're still both important metrics, telling different stories.

Common cash flow problems SMEs face (and solutions below!) 

Stock control

Stock control, like so many things, is a careful balancing act.

Order too little stock and you won't be able to fulfill demand or act on opportunities of increased demand. Order too much and you tie up cash flow in products that will give immediate returns and will cost you in storage charges, decreasing the amount of cash available for day-to-day operations.

Hefty payment terms

52% of B2B payments are still done by bank transfer which means that most small businesses rely on their customers to manually make payments within the agreed payment terms.

Lengthy payment terms will leave you waiting a long time for the financial return on your work. Whilst you wait for your clients to pay, unseen bumps in the road will be eating into any cash reserves you have. Similar to the example above, if you have a great June and pay for lots of materials, but don't get paid for those jobs until August, you'll need to use cash reserves to pay for the large amounts of resources, until the money comes in.

If the worst happens, say a large piece of equipment breaks, or you have a fire in a property, you might, despite being due payments, not have the cash around to fix it yet and will need to rely on your savings. Making sure you get paid as soon as possible after completing a job enables you to replace those reserves as quickly as possible.  

Factor in: 

  • Do you know what the average time your clients are taking to pay you? 
  • Are you paying your suppliers too quickly (which has the reverse impact)? 

Overspending and overtrading

It's so easy to spend cash when you're trying to grow your business. Facebook ads, SEO, websites, branding are all touted as the golden bullet to business growth. But don’t be tempted unless you have it planned. 

A budget that is feeding your cash flow will ensure that you know how much you have available to spend and if it is not in the budget, you must add it to see the impact on your cash flow before you buy it! 

Similarly, overtrading can be detrimental - yes, unbelievably you can have too many orders! 

If you need to purchase materials before you get paid for fulfilling a job, you can end up spending more than you have in the bank, relying on overdrafts and loans. If your invoices, then, aren't paid on time, you can end up in tricky situations where you're having to scrounge for cash, or paying your expenses late

Seasonality

Seasonality has a huge effect on your cash flow, for the same reasons we've mentioned above. If you haven't had much business through February and March, but know that April is your best month, buying materials, investing in marketing and making preparations for April means you'll need to spend a lot before seeing any returns.

If your business is reliant on particular seasons or periods in the year, working with a cash flow forecast allows you to ensure those good months help out the not so good, by helping you plan and budget your cash accordingly.

If you are building a cash flow forecast for the first time, it does not need to be difficult. Working with an experienced accountant or a tool like Futrli Predict will take the heavy lifting out of it using AI and machine learning to predict your cash flow.

So, what can you do to improve your cash flow?

Your cash flow is crucial to keeping your business on the straight and narrow. There are lots of procedures that can be put in place to encourage best practices for your cash flow management.

Encouraging payment collection

Late payments are one of the biggest problems facing today's small businesses. In a recent survey by Xero and PayPal, it was found that 48% of invoices were paid 14 days late, on average.

In real terms, this means that the average UK small business is owed £23,360 in late payments, a 17% increase on 2018!

Using accounting software such as Xero, can help you collect payments, as the invoicing tools they offer will help you send automatic reminder emails to your clients, and it also allows you to add additional methods of payment collection to your invoice such as getting your invoice paid via credit card with Stripe. What’s more, both Futrli and Neat integrate with Xero, so you can automate your payment collection, accounting and cash flow management to a great extent.

Cut your costs

One benefit of building long-term cooperative relationships with your suppliers is being able to negotiate better deals with them, with reduced pricing or extended repayment periods. You will be a customer they will be relying on their cash flow for their next year and so may be willing to reduce costs in order to keep you.  Use Futrli Flow to see your total spend with particular suppliers.  The Flow feature also acts as an audit: in the tech world we live in now it is very easy to be paying for online services that you no longer use, the list of suppliers in Futrli Flow will reveal this! 

Other general ways to reduce your costs include evaluating and reducing your expenses, innovating new ways to make the most of materials (using leftovers), consolidating your production/office space, reducing paid marketing spend (and investing in organic marketing instead), and going paperless. 

Where to invest?

If your cash flow is a pinch point, consider the money you're investing in the financing portion of your business. Are you reinvesting a lot? Are you trying to grow too fast, or at a bad time? Review the next 12 months as predicted in your cash flow forecast. There may be a more stable time for you to focus on growth ; use tools like Futrli Predict to see what happens to your cash flow if you delay expansion by a few months. Use data to drive decisions, not personal ambition (although a healthy portion of this goes a very long way too!). 

Consider leasing at first, instead of buying

Equipment and machinery will often require massive upfront payments, as well as payments for the maintenance that comes with them. Especially in your early days, when upfront costs are high, one option to consider is leasing.

It does work out more expensive in the long run, so we wouldn't recommend leasing everything you need, but it can be helpful for the equipment you won't need for every job or those with the biggest price tags. It also means more predictable expenses - there will be no surprise maintenance costs with leased equipment. 

Alternatively, if you still want to buy, consider purchasing refurbished equipment. It will, if from a reputable source, come with a warranty, and often will be brand-new, having been deemed 'unsellable' for a minor fault or scratch.

Optimize your inventory

As we mentioned earlier, buying too much stock, or having excess stock on hand can be detrimental to your cash flow. By optimizing your stock, you can ensure these issues are well avoided.

Stock optimization is also called inventory optimization. This is basically to make the stock as lean and beneficial as possible. This means that it will be optimized in such a way so that it is the ideal size, thus ensuring the supply needed for all purchases. You cannot do this without a solid cash flow forecast which has been built to account for the seasonality of your business and has accurate growth predictions. 

Increase your prices

Increasing your prices can seem like a terrifying move to make, but it can work out. If your business is stable and you have regular customers, they'll likely understand a slight price increase - there's no way to know without trying. Moreover, you could offer early bird discounts if you’re hosting events, or if you’re running an eCommerce store, try to get customers to sign up to a waitlist and pre-order new items and make the payment upfront. 

Knowing the state of your cash flow is key 

Regardless of your business size, turnover or complexity - cash management must be your core priority. All decisions you make from hiring to product lines to pricing should be made against the cash flow forecast. Your cash position and projected cash position should be part of your monthly operational meetings with either your accountant or your team. Finally, you do not have to be an accountant to get this right, technology like Futrli Predict will do the heavy lifting for you and ensure you stay right on track.

Learn more about Futrli here!



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