Managing Cash Flow: An SME Guide
Having a healthy cash flow can enable a small business to solve problems quickly when in a financial pinch, or enable smart investments that bring about slow and steady growth.
When revenues exceed costs and there’s a good flow of cash within a business, it’s often able to increase its liquid assets, which include cash or currency, bank accounts (including savings), and accounts receivable (the debt owed by your customers). This is a great position for a business to be in, however if cash flow is weak, then it may struggle to seize growth opportunities.
To help ensure businesses can remain in the former category, this guide will explain how cash flow works, touch on relevant terminology, and share some tips on how to boost cash flow within a small business.
What is cash flow?
In business, cash flow is all about juggling the amount of cash moving into and out of the company. This is essential for businesses of all shapes and sizes, as cash is of course required to be able to purchase stock, pay employees, and fund growth.
To really understand cash flow, it’s important to view it as part of a cycle that involves inventory, receivables, cash, and payables, before repeating itself each month. Technically speaking, there are two levels at which cash flow is typically assessed:
- Operational level
- Strategic level
The former encourages a day-by-day or week-by-week understanding of how cash flow is moving, while the latter typically involves projecting over the coming months or years. Let’s dive into a little more detail on these different views.
Operating cash flow
SME owners may do well to create a cash flow forecast that covers them for the next 8-12 weeks. This short-term type of financial management can help ensure the business is well equipped to meet its costs.
For example, a business that’s releasing a new product line should take steps to ensure it has enough cash in the bank to purchase the volume of stock required to fuel the product launch. If this short-term planning is properly managed, the business should be able to continue making sales and driving revenues. Conversely, if planning is inadequate; perhaps previous product launch data isn’t factored in or seasonality isn’t properly accounted for, then the business may simply run out of cash and growth may be halted.
That’s why planning is key in cash flow management. It’s also useful to understand exactly how to supplement cash flow, and understanding the external finance market could really help with this.
Strategic cash flow
A short-term view of cash flow isn’t the only important view a business owner should take, though. Instead, cover all bases by also developing a strategic cash flow plan. This should span over the next 6, 12, or 18 months - and should identify how much cash your business strategy will demand at each stage of its development. You can include seasonality, key events such as product launches, and even plan for competitor activity as part of this exercise.
A strategic cash flow plan is best supported by as much relevant data as possible. Perhaps the best source for this data is your annual cash flow statement, which should marry up findings from a balance sheet with any historical cash flow data and profit/loss.
Cash flow problems and how to overcome them
So, we’ve established that two views are needed to fully understand cash flow, that forecasting is essential, and that a cash flow statement can provide your business with useful insights. If, despite taking these steps, a business still runs into cash flow problems, what should the response be?
The first step is to determine whether the business is insolvent, i.e. is it able to pay off its debts? In the case of insolvency, one may be best off seeking advice from an insolvency specialist, who could share expertise around how to get access to cash quickly to keep the business afloat.
If, though, a business is facing more typical cash flow challenges, here are some quick tips on how they can be navigated:
- Making quick adjustments to the business model. Cutting back on expenses is a common quick fix for temporary cash flow shortages, but adjusting prices to boost profits could also prove a viable option.
- Revising the business’ commerce offering. If customers are being showered with credit options, it may be wise to reconsider whether it’s viable for the business to take on so much short-term debt. Alternatively, accepting payments via alternative channels, such as through a website, could help to secure more sales.
- Tightening up internal processes. An SME owner may need to work closely with their accountant or financial lead to roll out an emergency budget that sees revenues protected during a difficult period. There are also practical steps that can be taken here, such as tightening up outgoing sales communications or invoicing more frequently.
Ultimately, having a robust cash flow forecast is a no-brainer for SMEs, as it helps teams plan around factors such as seasonality to help anticipate cash flow challenges. One other planning option that can help ensure a business has the right access to cash is understanding external finance.
How to improve cash flow
So, if you’re an SME owner, accountant, or financial lead within an SME, how could you start to strengthen your cash flow?
One good option could be to set up a financing facility with an external provider, such as a bank or online lender, which could guarantee the access to cash a business needs if its costs suddenly exceed its revenues.
While the exact details of a lending agreement vary between providers and product, you’ll generally find that you need to go through eligibility checks and a setup process before you can access money. So, this may not be too helpful if used reactively.
Given it could take anywhere from a couple of days to a couple of months to sign a lending agreement, some of the options you could look to explore now include:
- Short term loans. Loans could help you manage cash flow problems if you need to inject cash into your business as a bulk sum. Many short-term loans are repayable over the course of a couple of years, and you could borrow up to £250,000.
- Invoice financing. If you’re often finding yourself waiting for invoices to be paid, then having the option to get the majority of that invoice paid up front could be a huge benefit if you’re struck by a sudden cash flow problem.
Having the right finance product in place can unlock strategic ways for you to start growing your business through your cash flow management. Beyond this, you could also look to boost cash flow by:
Ensuring you have a robust approach to cash flow management
If your team is fully aligned with your cash flow modelling, and you have a shared vision both for how to respond to cash flow shortages and how to grow your business over time, you may reap the rewards of putting in slightly more effort than your competitors in this area.
Improving your skills and expertise as a businessperson
If you increase your expertise surrounding your product and market, you could find yourself spotting more opportunities to boost your cash flow. Becoming a better negotiator could help you reduce supplier costs, and understanding your customers could help you gauge which credit options to offer.
It’s worth considering that your personal and professional growth could well have a knock-on effect on your business’ financial health.
Nailing down your inventory strategy
It’s important to double-down on the products that are selling well, and ensure that you have the right inventory levels to continue to generate revenue. Making efficiencies in this area directly impact your business’ ability to sell, which is the fundamental predictor of cash flow issues.
So, take every step possible to carefully manage inventory. Check which products are thriving, compare your performance with your competitors at product level using all of the data available to you, and you may see the results reflected in your bottom line.
Ultimately, cash flow management is all about proactively planning for the short and long-term, reactively supplementing cash with external finance, and knowing how to tackle different types of common cash flow challenges.
How could Rapid Cash help?
At NatWest Rapid Cash, we’ve helped thousands of small businesses overcome their cash flow challenges and position themselves for steady, long-term growth. We do this by offering an innovative type of invoice financing product that gives you quick access to cash on your unpaid invoices.
Our solution integrates with your accounting software to offer you a line a credit. From there, you can choose which of your unpaid invoices you’d like to borrow against, which could help you maintain a healthy cash flow and empower you to seize opportunities. If you’re interested in learning more about Rapid Cash, see how we compare to other finance products.
To be eligible for Rapid Cash, businesses need to have been trading for a minimum of 6 months and have an annual turnover of at least £100k. Businesses need to be Limited Company or Limited Partnership registered in England and Wales. Additionally, you need to invoice other businesses and use one of the following digital accounting software: Xero, Quickbooks, Sage 50, Kashflow, FreeAgent and Netsuite.
Security and guarantee required. Product fees may apply.