Business Cash Flow

For UK SMEs, a healthy cash flow is a key indicator of business success. Small and medium enterprises with a well-managed, optimised cash flow have the best chance of surviving… and thriving!

But in reality, many businesses face ongoing cash flow difficulties, even when they’re turning a healthy profit on paper.

Left unaddressed, cash flow issues can lead to operational difficulties, a loss of reputation, and even insolvency. The Federation of Small Businesses (FSB) reports that two key reasons for UK SME failure are poor cash flow and late payments.

Read on to find out more about business cash flow, its importance to UK companies, and strategies that business owners can take to ensure sound financial health.

What is business cash flow?

Business cash flow describes the money that moves in and out of the business. These cash movements are tracked over a defined period and recorded in the business’s financial records.

• Cash inflows are received from customers, investment income and finance income.
• Cash outflows are spent to cover expenses such as payroll, rent, interest payments and supplies.

Did you know, a survey by the Department for Business, Innovation and Skills found that 42pc of SMEs believed their cashflow to be a major obstacle to business success?

Read more – business cash flow loans or limited company loans.

What are the different types of cash flow?

There are three primary categories of cash flow, as follows:

1. Operating cash flow is the category most people are familiar with. It measures the cash movements from the company’s operations.
2. Financing cash flow measures the cash received from dividends, investor payments and loans. It reflects transactions between the company’s owners and its creditors.
3. Investing cash flow records cash movements relating to long-term assets and investments.

Each of these three different types of cash flow is recorded on the company’s cash flow statement in its own section.

Each of these cash flow categories can have a positive or negative associated figure.

• A positive figure shows the business is earning more than it spends.
• A negative cash flow shows that it’s spending more than it earns.

Read more – unsecured business loans, secured business loans or merchant cash advance.

Why does cash flow matter so much for UK SMEs?

Company profits grab headlines, but cash flow can make or break the business. Every SME needs enough positive cash flow to run its operations, meet financial obligations, invest and handle any unexpected hurdles.

The main reasons that positive cash flow matters to businesses are:

Bill payments

Positive cash flow allows businesses to meet their bills, including supplier payments, utilities, staff payments and rent.

Investment

Healthy cash flow enables investment. This means the business can deliver its business strategy and hire staff, expand the business operation and grow its product line to meet broader strategic goals.

Debt avoidance

Healthy cash flow also helps businesses avoid debt, in particular, expensive emergency borrowing. SMEs often lack large financial reserves, so a strong positive cash flow from a large customer base can provide certainty.

Financial resilience

A strong business can weather financial storms. A strong positive cash flow helps UK SMEs handle unexpected financial events (economic downturn or inflation) or seasonal fluctuations.

What causes cash flow issues for UK SMEs?

Common causes of cash flow issues for UK SMEs include the following:

1. Seasonal fluctuations

Many businesses have earnings profiles that vary over the year. For example, retailers often have a spike before Christmas, and outdoor venues do most business in spring and summer.

2. Late payments

When invoices aren’t paid on time, this can translate into significant, ongoing issues with cash flow.

3. Rapid growth

When businesses grow rapidly, also called overtrading, cash reserves may deplete. This is because extra sales cost more to process, from additional raw goods to extra staff time.

4. Unplanned opportunities

If the business sees a chance to capitalise on an opportunity, it may need to increase its outgoings in the short term.

5. Unexpected expenses

Unexpected tax bills or repair costs can create unexpected costs.

How can UK SMEs improve their cash flow?

UK SME businesses can improve their cash flow with a blend of forecasting, effective operational and financial management and slick processes.

Very often, good cash flow management also involves access to smart business finance tools.

Here are some top tips to improve your cash flow as a UK SME:

1. Get better at cash flow forecasting

Cash flow forecasting helps you identify expected cashflow movements over a certain period and the anticipated net effect on your business reserves.

Usually, businesses will forecast their cash flow for the year ahead to enhance planning.

Cash flow forecasting software can be a powerful tool to support this process and make it easier.

Some businesses also use spreadsheets.

2. Keep your invoicing processes tight

Review your existing invoice management processes and benchmark them against best practices to identify improvements. The main principles are to

1. Invoice as soon as possible
2. Offer payment terms that work for your business (typically 30-90 days)
3. Ensure invoices are issued error-free, with full and accurate information, plus contact details for queries
4. Invest in invoice software to automate the process and reduce errors. This will flag up late payments and initiate next-step processes for chasing and collections automatically.
5. Consider a form of invoice finance to help smooth out issues with invoice late payments.
6. Adequately resource your credit control team or outsource invoice collections with a factoring arrangement.

3. Offer incentives for early payments

Offer discounts or similar incentives to customers who pay their invoices early.

This will help to build loyalty and speed up payment turnarounds for improved cash flow.

4. Extend your own payment terms

If possible, extend your own payment terms with suppliers, so you can profile cash inflows with outflows as much as possible.

Work on good supplier relationships and invest in communication to unlock favourable terms as a preferred supplier.

5. Manage inventory carefully

Become slicker at inventory management so that your business cash flow isn’t unnecessarily tied up in inventory.

Better stock control can be supported with just-in-time systems and cloud-based software for warehouse management.

This also helps to avoid costs associated with damaged or expired stock.

6. Build an emergency fund

Build up an emergency fund so that you have sufficient reserves to handle any crises.

This can be the difference between business survival and failure in a crisis, including an economic downturn.

7. Invest in digital accounting tools

If your SME business isn’t yet using digital accounting tools, invest in them now.

Software solutions such as QuickBooks, Xero or Sage help to streamline and automate your cash flow systems and improve access to data for sound decision making.

8. Create a culture of good cost management

Many businesses have areas of non-essential spending that could be cut. Work on developing a culture of good cost management across your operation.

Charge department leads to review spending and challenge expenses to see where efficiencies can be made.

Often, front-line staff can see examples of wasted money, so encourage their involvement in this process. It can feed into broader operational efficiency work to improve processes overall.

By cutting wasteful spending, your UK SME can instantly improve its cash position.

9. Look at invoice finance

Invoice finance can help your business to tackle issues with late payments and improve your cash flow. There are two main types to consider, invoice factoring and invoice discounting.

Look also at other forms of alternative business lending to bridge any short-term gaps and make your business more resilient to unexpected costs.

This could include specialist business finance, asset finance, overdrafts and business credit cards.

A business finance broker, such as ABC Finance, can help you find the most competitive and reliable solutions for your business needs.

10. Speak to HMRC

If you’re concerned about the impact of a large tax payment, speak to HMRC and spread your tax payments under the government’s Time To Pay Scheme.

Concluding thoughts on business cash flow essentials for UK SMEs

Good cash flow management can make or break your business. Even the most profitable company with the strongest strategy, market position and sales figures can fail if its cash flow gets out of hand.

By building up a clear picture of your cash flow, managing it carefully, and taking advantage of the tools and financial solutions available to your business, you can shore up your operation to maximise its resilience.

Good cash flow management helps to control your business’s future. It also takes away the stress of unexpected bills and outflows, and allows businesses to take advantage of any exciting opportunities that may arise.

Find out more about flexible business finance solutions

Smart business finance solutions are a key component of good cash flow management.

From invoice finance to overdrafts and specialist business loans, access to flexible and timely financial services gives businesses peace of mind and insurance against the unexpected.

Contact ABC Finance to find out more about the competitive finance solutions available to UK SMEs today.

Why ABC Finance?

ABC Finance is an award-winning FCA-accredited brokerage offering access to highly competitive deals for UK businesses.

Our advisors can explain the financial options available to you and then secure the best possible offers from lenders.

Our family-run business operates to the highest codes of practice.

We are voluntary members of FIBA (The Financial Intermediary and Broker Association, as part of our commitment to the highest operating standards in the financial brokerage industry.