Running a small business has always been a balancing act, but in recent years, economic uncertainty, rising costs and shifting interest rates have made it even more crucial to keep a close eye on your cash flow. If your cash position isn’t as strong as it should be, now is the time to act.
In this guide, we cover why cash flow matters, how much cash flow is considered healthy, and, most importantly, practical ways to improve cash flow in your business.
Need a hand managing your business finances? Reach out to the team at Ascott Blake.
Why cash flow matters for small businesses
Cash flow is the movement of money in and out of your business. It includes income from customers and outgoing payments such as rent, salaries, and supplier expenses.
Healthy cash flow means you’re generating more money than you’re spending. If you experience frequent cash flow gaps or struggle to pay bills on time, it may be a sign that your cash flow management needs attention.
Why does this matter? Because positive cash flow is essential for meeting your financial obligations, reinvesting in growth, and maintaining business stability. Even profitable businesses can struggle if their cash flow isn’t managed properly. Without enough cash on hand to cover monthly or quarterly payments, tax bills, or unexpected expenses, your operations can grind to a halt.
How much cash flow is good for a small business?
Your ideal cash flow will depend on the type of business you run, the stage you’re at, and your future goals. The general rule of thumb is that you should always have enough in the bank to cover at least three to six months of running expenses to bridge cash flow gaps.
Having positive cash flow keeps your business afloat during economic challenges, seasonal fluctuations, and periods of general uncertainty. You can also use surplus cash to generate extra income by storing it in high-interest accounts.
It’s a good idea to regularly review your cash flow forecast to assess whether you’re generating enough income to meet your obligations, and how to adapt if not.
What can I do to improve cash flow in the business?
There’s no doubt that UK small businesses face ongoing challenges, from interest rates to inflation-linked pay increases. But the good news is that effective cash flow management can ease the pressure and strengthen your financial health.
Here are our top strategies to strengthen cash flow and help your business thrive.
1. Regular cash flow forecasts
The best way to avoid cash flow problems is to get ahead of the game, so it’s a good idea to prepare a weekly or monthly cash flow forecast.
Forecast accuracy is crucial for maintaining control. With precise data, you can enhance forecast accuracy, cash flow, and spot pinch points before they become problems.
These forecasts shouldn’t just look at your expected cash receipts, upcoming tax bills, planned expenses, and net cash balance; accurate cash flow forecasting should also plan ahead for various scenarios that could be out of your control. Factor in increases in materials, energy, tax, salaries, and interest rates and identify how your business can cope with these changes.
2. Review and update your pricing strategy
If you’re offering the same prices as last year but your distribution costs have increased, you could be losing money without realising it.
So it may be time to assess your pricing strategy and start sharing the increase with your customers. It’s a common step that many companies take – just think about the everyday products and services you already pay more for, from groceries and utilities to mobile phone contracts and software subscriptions.
This is an understandably difficult move, but there are alternatives to a straight price hike. Consider allowing customers to pay in instalments or offering early payment discounts. Loyalty schemes can also boost sales and customer retention.
3. Review your expenses and spending
In our long experience of working with small businesses, we’ve found there’s always a way to reduce costs. Many small businesses have significant cash tied up in underused equipment and other expenses. Cast a critical eye over your business costs and make cuts where you can.
For example, make sure you are on the best energy tariff, and if not, look to change supplier. Look at where energy savings could be made, such as energy-saving lighting and turning off unused equipment. You could consider installing smart meters.
Assess your use of materials and seek to be more efficient, or look to source new domestic suppliers to save on shipping costs. If possible, look to hold less stock at any one time. Remote working has become more popular in recent years, so you may want to consider downsizing your premises or assess whether remote working is an option.
4. Be tax savvy
Make tax planning part of your ongoing cash management.
Tax planning is not just about compliance, it’s about maximising the cash generated within your business. Stay on top of deadlines and make tax and VAT planning an ongoing priority. With careful planning, you can take advantage of tax reliefs such as R&D tax credits and have a good understanding of exactly which expenses you can claim.
5. Don’t be accepting of late payments
Late payments are one of the most common and frustrating cash flow challenges for small businesses, and when customers pay later than expected, it can quickly disrupt business operations. In the B2B world, all businesses have a duty to make payments on time, and those who don’t risk being penalised.
To protect your business and prevent cash flow issues, make sure you have a clear credit control process, set out clear payment terms from the beginning, invoice promptly, and remember to set aside time each week to chase clients for overdue payments. It’s also worth introducing late payment fees to encourage quicker settlements.
6. Seek business funding
If you’re facing short-term cash flow problems, business funding might help bridge the gap. It’s crucial to assess your options carefully, though, as you’ll need to make sure you can repay what you borrow. As always, be mindful of fluctuating interest rates.
If you have existing business or bank loans, make sure you are on the best rate available. Or consider moving to a more long-term agreement to reduce your monthly outgoings.
7. Consult an accountant
If you’re finding your cash flow situation overwhelming, don’t go it alone. A qualified small business accountant like Ascott Blake can help you find ways to improve your situation, build accurate forecasts, and generate positive cash flow.
Improve your cash flow with Ascott Blake
At Ascott Blake, we work closely with small business owners to resolve different cash flow issues, reduce overheads, and support healthy growth.
As a proactive team of chartered accountants, we will work hard to find savings and help grow your profits. We look at strategies like reducing payment delays, calculating your planned expense payments, planning for different situations, refining your pricing model, and making tax work in your favour.
Whatever you need, we offer a range of accounting services which can transform the way you manage your finances and keep your cash flowing.
Call us on 01279 797 222 or get in touch online to optimise cash flow for your small business.
