Cash flow relates to how money flows into and out of your business by way of income and expenditure. In order to stay solvent, more money needs to be coming in than going out. Maintaining this positive cash flow means bills, supplier costs, wages and other outgoings can be met on time. Negative cash flow can quickly bring about mounting debts and a struggle to survive.
COVID-19 has meant that businesses have to quickly focus on their staff, logistics and business risks in order to keep positive cash flow going.
The full economic impact of the coronavirus pandemic is yet to be known, but there are steps you can take to help minimise the damage to your small business as much as possible.
You can’t control what you haven’t measured
Carrying out an up-to-date calculation around exactly what working capital your business has right now is an excellent place to start. Consider factors such as:
- Have I invoiced all clients who are due an invoice?
- Are there any invoices which are currently overdue? If so, how long overdue are they and how much are the amounts?
- How much stock have I currently got?
- What orders have I recently placed? Are these all essential or could some be postponed/cancelled?
- What is the time gap between paying our suppliers for materials to receiving cash from customers?
- How much cash is tied up elsewhere in the business?
Create a cash flow forecast
A cashflow forecast (over a set period) will help you to plan how much you plan to make in sales, what your expected costs will be, and enable you to try and understand when to expect cash will come into your bank account and when it will go out of your bank account.
By having all this information set out, you’ll be able to make informed decisions about your business and help you answer questions such as
- Will I be able to launch a new product/service that will generate an income?
- Am I at risk of running out of cash?
- Should I consider borrowing money?
- When will I be able to take more money out of my business?
- How much money should I borrow?
To build a cash flow forecast, we recommend forecasting sales, profit and loss, and cash flow.
Consider the potential short and medium-term financial implications of the coronavirus pandemic. Turn your attention to covenants and liquidity so that you can create an immediate cash flow forecast and plan accordingly. Don’t forget, it’s also worth checking through your finance documentation to see if there’s any flexibility on essentials like loans and credit. There may also be short term government funding schemes available and we will be able to assist you with these.
Quick tips for effective cash flow management
It’s important to spot ways of managing your cash flow going forward. Here are some ideas:
SMEs should aim to invoice customers as soon as their work has been completed, to reduce the time it takes to get paid. Furthermore, if there are any problems with payment they’re often harder to sort out as time goes by, further delaying payment. Sending invoices electronically is the best and fastest way to receive payment and keep a paper trail.
Chase your debts
Pick up the phone, speak to your customers, ask them why they haven’t paid and when they are going to pay.
Look at your overheads to see what expenses come out monthly, quarterly or annually. Are you able to switch utility suppliers or cut back on rent to save money? Can you renegotiate interest on loans or cancel subscription payments for things that the business doesn’t regularly use?
Making payments easy for customers
Known for harbouring bacteria and viruses, cash is not an ideal form of payment during COVID-19. Many businesses are now expanding their payment options and offering contactless for the first time.
Customers should be able to make payment as quickly and easily as possible. Alongside card payments, online transfers are ideal but cheques should be avoided as they can result in delays.
Negotiate longer payment terms
An effective way of improving your business’ cash flow situation is to lengthen your payment terms with vendors and suppliers. It can be an efficient way to free up cash to expand or diversify your operations, enabling you to keep the cash in house while still collecting revenue. This will give you the ability to put your cash to use in ways that can add to your bottom line. If you are thinking of negotiating payment terms with a supplier make sure you are honest and reasonable. It is also a good idea to try and make your proposition mutually beneficial.
Leasing equipment instead of buying it
By leasing computers, vans, cars and other business equipment, you can get the latest technology without tying up cash. You can also expense the lease costs on your business taxes.
Reduce costs of borrowing
Consolidating debt to a more attractive lending platform with better interest rates
R&D Tax Credits
Companies undertaking legitimate research and development are able to claim reduction in Corporation Tax. Loss-making companies can receive a tax lump sum instead and claims can be worth thousands.