How to keep cash flowing in difficult times

At a glance

• Late payments, increased costs and seasonal slowdowns in revenue can put a squeeze on cash flow for SMEs.
• It’s important to take steps to minimise the risk of late payments and to prioritise building cash reserves so that you have a buffer if the unexpected happens.
• To fund a cash-flow shortfall, you could explore simple financing options such as a business overdraft or invoice factoring, as well as renegotiating terms with suppliers.

With the challenging economic outlook, small and medium-sized enterprises (SMEs) face increasing pressures on their cash flow. Owning a cash-strapped business can be stressful, but there is much you can do to keep the pounds flowing.

Three of the biggest causes of cash-flow squeezes are late payments from customers, rising costs and seasonal slowdowns.

Research by Xero and Accenture in 2022 revealed that late payments cost UK small businesses an estimated £684 million a year. This is due to them being paid 5.8 days late on average, with 49% of invoices issued by small businesses paid late.¹ If economic problems continue into 2023, this threat could become even more significant.

Another pressing problem is inflation and the rising costs of doing business.

According to recent figures from loan provider Iwoca, 83% of small firms said their business was affected by inflation – up from 59% in 2021. Worryingly, a quarter (26%) have had to use personal savings to counter the effects, and 18% have stopped paying themselves a salary. Some even dipped into their pension pots (6%) and inheritance money (5%) to tackle the impacts.²

Seasonal cash-flow challenges have been exacerbated recently by more people working from home and transport strikes. In seasonal sectors such as hospitality, small businesses generate 28% of their annual revenues in summer, compared to 22% in winter, according to the Xero and Accenture report.³ So, a poor holiday season can have a devastating impact on cash flow.

How to improve cash flow: five tips

1. Strengthen your invoicing and collection processes

Start by making sure you invoice promptly and set payment terms for customers, ideally within 15 days. Get full or partial payments upfront where possible.

Use accounting software to track payments and send automatic reminders.

Sue Bramall, Director of legal content service Berners Marketing, previously worked in insolvency and says it showed her how quickly a business can go under when cash-flow problems arise. So, when starting her own business, she implemented several policies to avoid this.

“Most of our work comes via retainer or subscription paid by standing order or Direct Debit,” she says. “We don’t start until these are set up. For big projects, we generally require half upfront and half on completion. Zero tolerance for late payments is important, so they don’t become bad debt.”

Elaine Hurn, Managing Partner at Taylors Solicitors, suggests invoicing on a pro forma basis – before the work completes – until you build trust with your customers. Then, she recommends invoicing on delivery, rather than the end of the month.

“Explore how to improve the way you collect cash – for example, by incentivising customers with early-settlement discounts,” she adds.

2.Build reserves

Building a cash buffer is one of the simplest ways to protect your cash flow.

Sue says she decided never to borrow to fund growth and has always built reserves before investing in growth projects. “I’m definitely a saver rather than a borrower and having ready cash reserves has helped the business in other ways, too,” she says.

“We have obtained a few grants to fund software development and environmental improvements to our offices,” she says. “Each grant needed matched funding, so I was always glad to have cash in reserve, otherwise I would have missed these.”

3.Calculate a cash-flow forecast

Several forecasting solutions are available that allow you to automate your cash-flow analysis.

Neil Jackson, Senior Digital Consultant at Hurst Accountants, says: “These solutions integrate directly with cloud-based accounting systems, so once connected, will generate forecasts with live data. You can flex these scenarios to judge the impact of major projects or changes.”

Elaine suggests setting a cash-flow forecast for each month based on known outgoings, plus a margin. She also recommends incentivising staff to achieve your cash-flow collection targets.

4.Avoid using personal money

According to the latest SME Finance Monitor data from Q3 2022, a third (34%) of SME owners used personal funds to finance their business in the previous 12 months.⁴

Putting family money into a business is potentially dangerous, as you are risking your own financial future.

If you haven’t already created a limited company, do so, as it means you’re not personally liable for any of its losses or debts.

Sue says: “Fortunately, I’ve not had to dip into personal savings, but I have had to make hard decisions about whether to invest in new software or put money into my pension. As you get closer to retirement, these decisions become harder.”

5.Explore funding methods

Before dipping into personal finances, explore other ways to ease your cash flow, such as negotiating extended credit terms with suppliers or spreading the load by asking to pay big bills in monthly instalments.

Next, consider simple borrowing solutions such as a business overdraft or invoice factoring, in which you sell your unpaid invoices to a third party rather than wait for payment.

Another option is invoice finance, which enables you to use unpaid invoices as security for a loan.

Andrew Livesey, Partner at Taylors Solicitors, says if these options don’t work, you may need a restructuring plan. This could allow you to ring-fence excess debt and arrange to pay back some or all over a period of time. This may be workable if, for example, the problem has arisen for an unexpected reason, such as the failure of a major customer.

Getting advice about your cash-flow options

How you choose to fund a cash-flow gap will depend on your business and personal circumstances. Taking advice about your financial position can help you decide on the best way forward for yourself and your business – so call us today.

Where the opinions of third parties are offered, these may not necessarily reflect those of St. James's Place.

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