Put simply, cash flow is how much money moves into and out of a business over a given period. If the flow in (from sales, rental income and other sources) isn’t enough to cover the outgoing amount (payments to suppliers, rent, utilities and other expenses), that’s a problem.
A problem on the national level, actually, says Bacs, the organisation behind Direct Debit and Bacs Direct Credit. According to Bacs: “The UK’s smallest businesses are facing a bill of £6.7 billion, up from £2.6 billion in 2017 – just to collect money they’re already owed.”
Furthermore, says Bacs, nearly four out of five SMEs (78 per cent) that are owed money are having to wait one month or more beyond their agreed payment terms before they are paid.
Late payment pain is not evenly distributed across the business world, though. An analysis of over 10 million invoices (representing more than £24 billion of spending by some of the UK’s largest buyers) shows that, while late payments are rife throughout the supply chain, the smallest suppliers are paid 30 days late while firms charging the biggest fees are paid, on average, less than a day late.
These kinds of delays have a knock-on effect. One in seven UK business owners have found themselves unable to pay employees on time at some point because of cash flow issues. While, for more than a third (38 per cent), cash flow problems have left them unable to pay debts, including payment to their own suppliers. And that means the effects of that initial late payment to one company can continue to ripple out across the supply chain.
Keeping cash flowing
The government has taken steps to help small businesses deal with the cash flow crunch caused by late payments, including funding for technology to help make payments easier and assuming responsibility for the voluntary Prompt Payment Code. SMEs can also take steps to protect themselves by conducting some due diligence.
In addition to researching the payment practices of potential customers, there are other steps SMEs can take to help manage their cash flow:
Maintain good accounting records: If your records are not current and complete, you can’t know your situation.
Know how much cash you need: If your company is a start-up, you’ll need more cash in hand as you will have to do business for at least a few months before customers start paying invoices and revenue starts to flow in. If you’re established and customers are paying well, you’ll need less. If you have plans to expand, you’ll need more.
Follow up with your customers: Keep an eye on your accounts receivable. Send polite reminders when payments are late. Flag any accounts that begin taking longer than normal to pay their invoices; they may be experiencing a problem that puts you at risk.
Seek professional help: Some small-business owners are great with numbers and enjoy keeping the accounts. Most, however, already have a lot on their plates. Hiring a professional accountant to help keep the accounts and to provide advice can more than pay for itself in time and money saved.
Keep your business and your personal finances separate: Things get complicated when a business owner mixes personal and business finances. It makes it hard to determine how the business is performing and can cause major headaches come tax time.
Keep cash on hand: Some will tell you that cash in a current account is wasted because it’s not earning you a return. However, what it is giving you is flexibility. Flexibility to buy additional inventory if a good deal pops up. Flexibility to hire a vehicle if the company van breaks down. Flexibility to say no to a customer you have doubts about. Most of all, it gives you the flexibility to keep the business running while you calmly deal with any problems, rather than trying to scrape funds together during a crisis.
Dealing with cash flow is a challenge for any SME. It’s important to understand those challenges and formulate a cash flow strategy that works for your business. The numbers may seem intimidating at first, but they’ll also offer your best hope to succeed.