Bad cash flow: what it is and how to avoid it

What can a business do themselves to eradicate cash flow problems?

Poor cash flow continues  to be the #1 challenge faced by businesses today. Even if you sit on the top floor of a 20-storey building, have qualified staff and a handful of investors, there’s no guarantee that you may not experience cash flow difficulties. Your company may have enjoyed record profit levels in the previous quarters but still go bankrupt rather quickly.

Cash flow is a hot topic at the moment because every business can be affected, no matter what sector they’re in, their size or location. As such, it’s important for our readers and businesses in general to stay on top of their cash flow especially in these economically demanding times.

What is cash flow?

Simply put, cash flow is defined as incomings and outgoings of cash, describing the operating activities of an organisation. It takes into account all of your financial transactions and is the structure of your business’ income versus its expenditures.

Cash flow poses a threat to businesses

In this difficult trading climate, SMEs are struggling to break even as default rates are on the rise and trade credit terms are not being met.

If you must pay for materials to generate income in March but don’t get paid by your customers until May, then this poses a serious threat to your cash flow. You may also experience temporary cash flow issues if you owe more money than you have. Maintaining an adequate cash flow is of paramount importance. Your business’ income should be the same as, if not higher than its expenditures. This sounds simple, yet many SMEs and start-ups get it wrong.

They’re not really to blame because the regressive economic climate is making life harder for business owners. However, there are a few tips to help you balance the books and grow your business:

Cost-cutting - cut down on expenses

This is the obvious one. Cutting down your expenditures, no matter how little it is, can help you save money to prevent future cash flow issues. This could mean purchasing goods via auctions, buying used items or using power-saving appliances to reduce energy bills. A few months of cost-cutting may leave you with a tight budget but could result in a lifetime of profits.

Is your accountant good enough?

Whether you have a handful of accountants working on your tax issues or an accountancy graduate from the local university doing the bookkeeping, make sure they’re qualified and good at their job. Having a good accountant should help you reduce overheads as they should advice you on tax loopholes and how to grow your business. Your accountant should work with your business 365 days a year, not just at the year end to receive after-salary bonuses.

Secure a business loan

Raising finance to generate revenue is a proven concept and a suitable way of improving your cash flow position. This could be in the form of a bank loan, overdraft, payday loan or other loan arrangement. Watch out for the interest charge and make sure you stick to the repayment terms.

Improve cash flow with Invoice Finance

This is a form of business loan but no further debt is incurred. Collectively known as invoice finance, factoring and invoice discounting are cash flow solutions that allow you to receive a cash advance against monies owed to you by debtors, less any charges, typically within 24 hours of raising an invoice. However, eligibility for this scheme is only promised if your business has a minimum turnover of £50k. Working capital is created, your bargaining power is boosted and you can capitalise on vendor opportunities and discounts.