Avoiding Cash Flow

AVOIDING CASH FLOW PROBLEMS

By WKM Accountancy Services

Cash flow problems in small businesses

It’s common that most small businesses will have a cash flow problem at some point; luckily these can be prevented with planning and preparation.

Causes of cash flow problems

Identifying cash flow problems early could mean the difference of your business being a success or not. Some of the main causes of cash flow problems include: • Low profits or (worse) losses - Your profits are your major source of cash; if your business is not profitable you will not be able to cover the cost of all your businesses expenses. This could lead to you taking out a loan you can’t repay, or worse, your business closing down. Low profits could be for a number of reasons such as; you’re not charging enough for your products, or your marketing is not working well. • Too much stock- having excessive inventory is bad for cash flow. It’s important to fine-tune your inventory so stock is there for the shortest time possible. You should monitor your inventory carefully • Seasonality - your business may be affected by seasonality meaning you might receive more business more months than others; businesses usually face the greatest costs during their quieter months. This should always be taken into consideration when deciding how to manage your cash flow. • Poor financial planning- If you don’t create a financial plan and budget beforehand your business is likely to suffer from cash shortages. For example; if your business gives a long payment term to customers but you still have expenses to pay, you’re not going to bring in enough money to cover the costs. No matter what you do you’re always going to be behind • High overhead expenses - With prices rising, Overheads such as rent, telephone bill and utilities can get out of hand. To combat this, it’s important to review all these expenses and cut back where possible and perhaps find cheaper providers. Every business should audit their expenses regularly to stay on top

How to improve cash flow

So now you know some causes of cash flow problems, how can you improve your cash flow? Here are some tips to get you started • Create a cash flow forecast - A cash flow forecast will give you an estimate of when money will be coming in and out of your business; whilst it’s not exact, it allows you anticipate what your cash flow will look like in the future so you can take appropriate action. Your accountant can help you to prepare this and provide insight into areas that you may have overlooked • Have robust debt recovery procedures - It is vital to any business to have a good debt recovery system. If you’re not receiving money for your goods or services that money is not being injected into your business which can be catastrophic further down the line. It’s important to stay on top of these debts; the longer they go unpaid the harder they are to collect. • Invoice accurately and promptly - It’s important to get the basics right and make sure your invoicing is accurate and on time. Invoicing errors could mean you get paid late or incorrect amounts resulting in problems for your cash flow • Credit check customers - It is important to credit check all customers when giving them credit, it’s also a good idea to ask for and check their business references • Reduce expenses - As mentioned above its import to keep track of all your expenses. You should only be purchasing business-critical items. For more expensive items it might be a good idea to look into a payment plan to spread the payment which could free up some extra cash. • Get a good business credit card - Consider getting a good business credit card to pay suppliers and make purchases. The advantage of this is you have longer to make payments. Some cards also come with cash back features. • Offer incentives for customers to pay faster - Offering a small discount to customers who pay their bill early or charging a penalty for those who are late can help to keep your cash flow on track. • Work with an accountant- Working with an accountant should be seen as more of an investment than an expense. They can help you anticipate and plan for future cash flow problems so there will be no need to worry further down the line. If you need some support, please contact us on: Phone: 0115 8240555 Email: info@wkm-accountancy.co.uk Website: https:// www.wkm-accountancy.co.uk/contact/