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Top Tips to managing cash flow

It is often said that turnover is vanity and profit is sanity. But, even more importantly, do not forget that cash is king. Put simply, businesses fail because they do not have enough cash or other liquid assets to pay their bills or meet their immediate obligations. So, whilst increasing turnover and growing profitability are what every business owner is aiming to achieve, it is crucial to still have a very strong focus on cash flow and the levels of cash in the business.

In some sectors and businesses this is easy. These are typically service businesses or those that do not need to keep large stocks, and where sales are made on a cash with order or payment on delivery basis. In other sectors and businesses, however, managing cash can be much more of a challenge. These would be where the business needs to carry large or valuable stocks, or where the buyers expect to have time to pay for the goods bought.

There is also one other important influencing factor on how easy or otherwise it is to manage cash, and that is where the business is in its growth cycle. Growing businesses consume cash as they constantly need to pay for all that goes with expansion, whilst mature businesses tend to have a more stable cash requirement and it can be managed more easily. For the purposes of this article we will focus on younger businesses that are likely to be growing.

Given the importance of having sufficient cash in any business, what are some top tips to managing cash flow?

  • Capital – Growing businesses consume cash and are particularly vulnerable to failure as they have simply run out of money. The younger a business is, the more difficult it is to borrow money. This in turn means that any funding must be supplied by the founders or external investors. The point that many founders often do not appreciate is that raising external finance will normally take around six months and so it is crucial that they have a runway of around 12 months of cash at any time.
  • Stock – Stock levels need to be very carefully controlled to ensure that sufficient stock is held to satisfy demand, whilst at the same time it is not too large as this needs to be financed and ties up cash. Also, it is imperative that these is no dead stock.
  • Purchases – Wherever possible it normally pays to take advantage of any deferred payment terms (ie 30, 60, or 90 days) if these are available at no or low cost. However, as a smaller or young business these are often not available.
  • Sales – The perfect situation is that your sales are on payment with order or at least on delivery, as not only is this good for cash flow but it also protects against any possibility of bad debt. In an ideal situation you obtain deferred payment terms from your suppliers whilst at the same time achieving payment with order on your sales as this produces positive cash flow.
  • Margins – Try to keep profit margins as healthy as possible as not only will this of course produce the greatest profit, but it will also inject as much cash as possible into the business.
  • Cash Reserves – Whilst it is crucial to ensure that the business has a long enough runway in terms of capital, it is just as crucial to ensure that payment flows in and out are properly managed. One trap that many early stage businesses fall into is not putting any VAT received on sales to one side to ensure that they have the cash available to pay HMRC when it is due.
  • Costs – Early stage businesses will benefit by keeping as many of their costs as possible variable, rather than taking on too many fixed costs, as this allows for much more flexibility and reducing some short term costs in times of need.

Focusing on the points above, and trying to maximise each of them, should ensure that not only is cash flow maximized, but it is also managed as well as possible. If you manage your business cash flow well, then the chances are good that other aspects of your business are also being managed well.