An essential guide to cash flow management

Managing cash flow is vital to running a successful London business. No matter what industry you operate in, maintaining a healthy cash flow helps you meet important financial obligations and keeps your business stable.

Read on to learn more about cash flow: what it is and some practical tips for managing it. Understanding these principles gives you the tools to navigate financial ups and downs and set your business on a path to success.

What does it mean to manage cash flow?

Cash flow management is tracking the money moving in and out of your business. You monitor the cash coming in from sales, business loans and investments and going out as expenses on things like supplies, salaries and loan payments.

Managing cash flow is particularly crucial if your small business runs on a limited budget.

Why is cash flow management so important?

• Shows you what it costs to run your business. You can identify ways to lower your expenses or spend more efficiently. You can also make informed decisions about your financial planning.

• Lets you plan for future investments and spending. When you have a clear picture of the money flowing in and out, you can work out how much surplus cash you have to put towards growth for your business. This might include, for example, buying new equipment or hiring staff.

• Helps you meet your financial obligations. Knowing how much available cash you have means you can pay suppliers, employees and creditors on time.

Six ways to manage your cash flow

1. Develop a cash flow forecast

A cash flow forecast is a projection of the amount of money that will move in and out of your business over a certain period of time, usually every month or every quarter.

It takes into account all sources of income, as well as expenses like rent, salaries and utilities.

To develop your cash flow forecast:

• Create a list of assumptions. Base them on your predictions of the business' future sales and costs. With this data, you can forecast your future revenue accurately.

• Ask suppliers about possible price increases. Suppliers may be able to provide insight that can help you anticipate any price rises. With this information, you can estimate how much you'll be spending later on supplies and raw materials.

• Estimate potential rises in salaries and running costs. Your forecast needs to factor in any predicted increases in wages or operating expenses like rent, utilities or maintenance costs.

2. Work out your revenue

To calculate your revenue effectively, follow these steps:

• Keep accurate records. This means maintaining detailed records of sales, expenses and any other relevant transactions. Review them often to identify any changes or areas for improvement.

• Analyse your sales. Gather sales data regularly, taking account of any seasonal changes (like an increase in sales during the holiday season). Also consider any changes in the market or to what your London customers prefer when they shop.

• Look at the key areas of your revenue calculation. This means factoring in those costs from your cash flow forecast that change often and affect your profitability, such as projected salary increases and energy costs.

3. Control your expenses

Keeping your cash flow healthy means closely monitoring and managing your expenses. For example, you might look for ways to cut costs, negotiate better prices with suppliers (see 6 below) and carefully track and review all your costs.

4. Send invoices promptly so you get paid on time

Being paid on time (or not!) has a direct impact on your cash flow situation. Late payments can lead to a shortage of funds and make it harder to meet expenses.

If you don't already, try to send invoices as soon as you've provided the goods or services. Prompt invoicing sets the right expectation with your London customers and encourages them to pay invoices on time.

Consider using invoicing software to simplify the process and track incoming payments from customers (and unpaid invoices). Set clear payment terms and mention them on your invoices. You can also offer customers flexible payment options to urge them to pay quickly.

5. Build a cash reserve

A cash reserve is a 'pot' of readily available money you can use to cover unexpected expenses or a cash flow shortage. It's a really important safety net in emergencies and serves as a cushion to protect the business from hardship.

When building a cash reserve, try to set aside at least three to six months' worth of business expenses. This means working out your average monthly expenses, then multiplying it by the number of months you want to cover.

Deposit a fixed amount into the pot regularly – ideally after each profitable month. Making such a consistent contribution will keep your cash reserve growing over time. Try to be disciplined and make this pot of money a financial priority.

6. Negotiate payment terms

Asking your suppliers for more favourable payment terms can benefit you in several ways.

• Extending the payment period lets you hold on to your cash for longer. That gives you the flexibility to allocate your funds to other pressing financial obligations. This is especially valuable when you have seasonal fluctuations in sales or face unexpected costs.

• Getting late fees waived helps you avoid unnecessary penalties. That frees up extra money to support your business.

When negotiating payment terms, reach out to the supplier early and be reasonable with your request. This not only shows professionalism but allows both you and the supplier to plan accordingly.

It's also important to provide a valid reason for your proposal. For example, you might cite your long-standing relationship or the fact you've done more business with them. By focusing on win-win solutions, you're more likely to come to an agreement that satisfies everyone.

Summary

By implementing some of the above tips, you'll gain a deeper understanding of your finances, be able to plan ahead and keep your business financially healthy.

Read more:

• Accounting for small businesses in London

• How to tackle the rising cost of doing business

• How to improve your management accounts [WEBINAR]

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