Cash flow tips for small business owners

When running a business, you have your hands full every minute. There’s so much that needs doing that it is easy to take your eye off the ball when it comes to cash flow, and if you do, you risk scoring an own goal.

Did you know that poor cash flow management is the single largest cause of small businesses failing? Four out of every ten new enterprises will fold in their first five years due to net cash flow and operating cash flow problems.

At Libeo, we love to support entrepreneurs and small businesses. We want to free you from financial headaches so you can concentrate on solving the latest kitchen crisis! Managing cash flow is critical, but you don’t need to let it worry you. Here we’ll lay out what you need to know – and let you in on what you can forget about, too. 

Cash flow is king

If a business is like the human body, cash flow acts as the blood supply. And no matter how strong the heart is or how keen the brain might be, the body is in trouble without good circulation.

In essence, your net cash flow is the amount of money your company receives and spends at any given time. A cash flow statement can assess your business’s financial health or determine if a new project is financially feasible.

Net cash flow can be negative or positive. If it is negative, then the final amount available at the end of any given month or year is less than the amount at the beginning. Obviously, this isn’t good news. Just as the human body dies without an adequate supply of blood, businesses die without a supply of cash.

On the other hand, if you improve cash flow, your business has the resources to grow. You can develop new projects and deepen your relationships with your suppliers. Sometimes, just getting from one month to the next is worth celebrating in a new business, but you’ll reach many more pop-the-champagne milestones with a healthy cash flow.

So how do you make that happen?

Hold fire on accounts payable until the time is right 

Your invoices should be paid when due, not before and definitely not after. Many entrepreneurs, perhaps keen to minimise the hassle of their finances, pay invoices as soon as they receive them, but by doing so, they restrict their operating cash flow.

Sure, the bill is out of the way, but suppose you paid it two weeks early – not a big deal, surely? After all, the money will be going out of your account sooner or later. 

But what if, during those two weeks, some unforeseen crisis presents itself? A repair, perhaps, or a late-paying client that leaves you short. Cash flow management during crisis isn’t fun, but settling invoices at the time they are due gives you more flexibility with your funds so that you can sail through any unexpected storms.  

You want to maintain good relationships with your suppliers, so it is just as important to not pay your invoices late. Suppliers value reliable customers and will offer their best terms to those they want to keep. Would you offer your best rates to a customer you routinely had to chase up for payment?

Crystalise and chase your accounts receivable 

Recent surveys have shown that 58 per cent of UK small or medium enterprises are currently waiting on late payments.

To avoid joining the list, make sure your client signs off on a written agreement stipulating how and when to pay you. Include a complete description of your payment terms with any quotes you give, and talk your client through them so you can be sure they understand.

Send your invoice promptly. Don’t delay! A professional invoice should inform the client what they are paying for, when the payment is due and how they can make it. To avoid confusion – and time-wasting disputes – itemise and date each service or product. Where necessary, include a description of the service rendered.

Send reminders! Your customer is just as busy as you, and chances are, they might forget when the invoice is due. A friendly and politely worded reminder a few days before the deadline will maximise the chances of timely payment.

Dealing with negative cash flow

If you find your cash is flowing out faster than it is flowing in, don’t panic. You can take steps to stem the tide.

Negative cash flow does not necessarily mean that you are making a loss. A mismatch caused by paying your invoices too early while your customers pay late will cause negative cash flow. It might be a matter of timing that proper accounts payable and accounts receivable management can solve.

If this isn’t the case, it is crucial to prioritise future expenditures. If you are short of funds, avoid any purchases that aren’t strictly necessary. Save your business’s income so you can build up a reserve to meet essential expenses.

To improve cash flow you’ll want to develop a long-term view of your company’s finances. Identify predictable expenses and perform a cash flow forecast so that you can ensure you are not caught short. You may even want to plan for a higher figure – your future self will thank you! 

Review your payment terms too. Are they too long? If your monthly expenses are higher than your income, consider shortening your payment deadlines.  

How Libeo can improve cash flow management for small businesses

Libeo can make all of this easy. We mean really easy. Like, one-click easy.

Libeo is a way to centralise, validate and pay all your invoices without spending hours fussing over your books. It’s not a replacement for your accounting software. Instead, Libeo hooks up with your chosen accounting system – what’s more, it makes analysing and understanding your cash flow simple.