Updated: Mar 12, 2021
The old adage that cash is king has never been more true than right now. To illustrate this, a recent survey of over 250 startups by Slush showed that 49% only had a cash runway of 6 months or less.
Back in 2019, when COVID-19 was still unheard of, a report by CBInsights cited the second reason out of 20 for startups failing is that they ran out of cash; with 29% of those companies analysed citing not knowing how to manage their cash. Only no market need for their product came above cash flow as the top reason for business failure.
Xero, the UK’s most widely used cloud accounting platform, maintains a dashboard of key metrics which measure the financial health of SMEs. Their Small Business Insights dashboard reported that for February 2020, only 49.5% of small businesses were cash flow positive and, on average, small businesses were paid more than 11 days late. In fact, research conducted by Xero and PayPal revealed that more than one third of small business owners had considered closing their businesses due to problems with late payments.
So what are our tips for keeping on top of your cash flow?
The key to effective cash management is to have a detailed understanding of the working capital cycle in your business. This means understanding how cash moves through your business and how much of your cash is ultimately converted into profit.
For fast results, here are some tips that we recommend to focus your efforts in three main areas:
1. Debtors - who owe you money
Agree payment terms that are competitive but allow you to realise cash as quickly as possible. Standard terms are 30 days but this may not be right for your business, particularly in the early stages. Take account of market and customer expectations, what your internal cash requirements are and set your payment terms accordingly.
Consider offering discounts for prompt payment or offering stage payments to encourage customers to pay quickly. Prompt payment discounts are increasingly being used by all sectors to release cash quickly and encourage customer loyalty. Consider industry standards when negotiating discount rates and make sure you model the impact that the erosion of profit margins will have on your business and how this can be countered.
Make it easy for your customers to pay you. The two fastest methods to use wherever you can for customers to pay you are bank transfer or direct debit.
Consider incentivising staff on the basis of cash collected rather than just sales made. Or look at automating the credit control process or outsourcing the function entirely to free up management time. Cloud accounting packages provide in-built debt chasing services which automatically email out customer reminders at set dates and providers such as Fluidly offer outsourced debt collection services.
Invoice factoring (a form of finance where a factoring provider lends against the value of your customer invoices enabling you to receive most of the invoice cash value immediately rather than when the customer settles the invoice) is a form of finance available to small businesses who often have low liquidity and minimal Balance Sheet values to secure traditional forms of finance. There are lots of alternatives taking a new slant and variation on these solutions for example Pipe can be a valuable tool.
Be proactive in chasing outstanding invoices and always set credit limits to reduce the credit risk you have with any one customer.
2. Creditors - money you owe
Consolidate your spending with key suppliers where you can to take advantage of bulk discounts, negotiate better payment terms and always pay to terms and not in advance.
Use a tool like Futrli Flow which provides prompts and advice on how to improve your working capital management. Forecast and plan for your outgoing payments to ensure you make your cash work hard for your business.
If you are a business that also has related stock (i.e. physical products), you should reduce the level of stock holding in the business to free up cash. Stock held on the Balance Sheet represents an opportunity cost as cash is tied up rather than working to generate profit for the business, but it also has a direct cost in terms of storage, insurance and potentially obsolescence which needs to be minimised.
There are advantages of securing discounts through buying in bulk and running production runs at higher levels of capacity but these should always be modelled against the costs associated with tying up stock on the Balance Sheet.
Strong cashflow management is underpinned by strong financial controls. Adopt these good habits today:
Bookkeeping – stay up to date
If you are doing it yourself then build it into your daily routine so you have a clear view of what the business owes and what is owed to you. Cloud finance systems like Xero or Quickbooks Online provide a high level of integration and have been designed around the needs of Founders.
Consider automating manual bookkeeping tasks with an OCR tool like Hubdoc, Receipt Bank or Auto Entry which can speed up the publishing of routine supplier invoices and can automatically fetch and publish invoices and bank statements into your cloud accounting software.
Reconcile your bank and payment accounts regularly so you know how much cash is available. Wherever possible use bank rules to automatically reconcile recurring standard transactions and consider implementing an automated bank reconciliation tool to reduce manual processes.
Forecast regularly - Keep a rolling short term and medium term cashflow forecast and check it regularly.
You need a clear view of your cash flows for that month, for three months’ time and out to the end of the year so you can plan effectively. Keep it up to date and refer to it daily.
We like Fluidly’s visual cash flow forecasting tool and the way you can model the impact that decisions may have on your cash flows (such as hiring more staff, renting office space or taking out a loan).
Futrli’s Flow and Predict tools are also powerful cash flow management tools, providing useful prompts and advice with the added comfort of invoice protection insurance if you need it.
If bookkeeping is not your thing and you’d like to stay well away from forecasting, we can help! At GrowthBuilders, we can provide hands-on support to help you to understand your current position and to plan more effectively for the future.
To discuss how any of this can be applied to your business, contact Emily.