How to avoid cash flow problems

As a predominantly service-driven economy, the UK relies on consumers to spend, with seasonal fluctuations also having a considerable impact on the daily cash requirements of small businesses. Here we'll discuss methods to improve your cash flow throughout the year to avoid any potential issues and predict when you might need to access various funding options.

Create a cash flow forecast

Most of us are familiar with the yearly cash flow forecast. However, it's wise to get more granular and create a monthly cash flow statement. You'll quickly establish a monthly budget to help develop a highly disciplined approach to your spending. You can pinpoint the ebbs and flows of revenue and identify any potential budget gaps that need addressing.

Invoice promptly

You might offer 30–60 day grace periods for your customers to pay their invoices. You'll need to have a robust collections procedure to ensure this period doesn't get stretched. If clients consistently pay late, the ripple effect can damage your business.

You could also consider offering an early settlement discount within 14 days. Perhaps a 1-2% reduction is a reasonable consideration. Naturally, you'll need to ensure your profit isn't getting hit too hard as you recover funds early.

Ask large creditors for an extension

Although you should insist on your payments coming in on time and avoiding unpaid invoices, it's not uncommon to ask large creditors for extended payment terms. This isn't a hypocritical act of opportunism; it's effective management. These creditors could be utility firms prepared to match payment with your business income or lenders who might offer a payment holiday if you're a seasonal business.

Reduce expenses

If you compile the monthly budget previously mentioned, you might quickly identify unnecessary spending which you can eliminate. It's good housekeeping; you should reduce outgoings to be lower than incomings. If not, you'll run at a loss.

You might plan to run at a loss for months if you run a seasonal business, but this can't happen long term. Otherwise, you're not running a workable business.

If you're a sales operation with stock that isn't shifting, why keep ordering? You can't buck the market. If the feedback is negative, it might be best to sell some stock at a slight loss and invest elsewhere in the business before the stock loses value.

Increase your prices

Many businesses fear putting up prices because they automatically assume customers will vanish. However, you might want to compare prices with your competitors to see if you're cheaper than others. There's a difference between what represents value for money and what's affordable. 

Suppose you're running a restaurant with an excellent local reputation for a fine dining experience or a salon regarded as the best on your high street. Are your clients likely to avoid you if you raise prices by 10-15%? Why not compare your prices to competitors?

You might be pleasantly surprised at how much pricing bandwidth you have to play with. If you increase your prices regularly (perhaps twice a year) in line with consumer price inflation or retail price inflation, your clients won't experience a shock.

Business credit card

You get the card and the first limit like an overdraft, and you're under no obligation to spend. But the business credit card can be a superb method to help ward off any cash flow issues. You might have a temporary lack of cash coming into the business but can use the card knowing that you'll be back on track with your finances soon.

If you’re unsure your application for credit will be accepted, why not try our business loan calculator below to find out how much you could afford to borrow before beginning an application.

Improve your profit margin

You don't just increase your profit margins by raising prices. The price you pay at source dramatically affects the overall profit you retain, and if you buy badly, you'll harm your business.

It's therefore up to you to search for the best available prices in your market and negotiate hard with your suppliers and creditors. It's in their interest to see you succeed, so ask what they can do to help?

Get imaginative with selling products and services

You can avoid cash flow problems by identifying your quiet times before they happen and implementing countermeasures by clever sales tactics. If you're a restaurant suffering slow sales after Christmas, get busy by offering a discount for the third visit before Easter.

Think about upselling or cross-selling ideas if you're a retail shop. Whether online-only or a hybrid model, most website host charges come with included email packages or at a minimal added cost. It's up to you to get imaginative to think of ways to increase sales through direct communication.

Ensure you keep a healthy stocking programme

If you're a business that sells any products, overstocking can harm your cash flow. Sales representatives always want you to buy more, but you must balance their tempting offers with realism. There's little point in having stock gathering dust on shelves you purchased because you think you got a great deal.

You might consider investing in inventory management software. It can tell you what's selling, illustrate your sales pattern and suggest a workable buying pattern, including automatically placing orders. This process will remove the emotional impulse to stock up unnecessarily.

Accept online and card payments

Many reports prove that you'll lose business if you don't take cards. We've all walked away from shops that don't accept cards, then struggled to find an ATM on the high street.

Similarly, your website should have a transactional element, even if selling online is not your core business. For example, if you're a salon, you don't charge for hair cutting on the site, but you can sell products, or why not sell gift vouchers? A restaurant could charge for certain food products, and a central heating engineer could charge for simple maintenance products.

Applying for card processing is straightforward, and many firms are eager to get you onboard if you're a healthy and viable business. You can start the application process here. Once accepted, you might be able to apply for merchant cash advances, which brings us neatly to the overall subject of credit to alleviate cash flow problems.

Avoiding cash flow issues through working capital finance

You can consider several funding methods to prevent cash flow issues before they happen, and we'll briefly discuss four distinct ways here. We've also provided links to a more comprehensive description.

Working capital finance covers a wide range of funding options, from overdrafts to short-term loans and some options are a perfect fit for your business's unique challenge

Flexible business overdrafts

A business overdraft is a set amount usually added as a facility to a current account to smooth out short term cash flow issues. If needed, the overdraft limit is there, and you only pay interest on the amount used.

You're under no obligation to use the overdraft, and you won't incur any costs if you don't use it, although you might pay an arrangement fee, and the bank may withdraw it if your credit rating changes or it's not put to work for some time

Merchant cash advances

With merchant cash advances, business owners borrow a fixed sum and pay the money back through a percentage of card transactions. Businesses are advanced cash against their future sales through their card processor. This funding choice is excellent for businesses that previously applied for overdrafts.

Invoice finance

You don't wait weeks for your invoices to be paid with invoice financing because lenders at once advance you most of the value. That means you get paid faster for completed work, leaving you to focus on what you do best, running your business.

We've outlined many practical ways you can avoid temporary cash flow issues. However, in some businesses, such problems are inevitable. That's when you probably need to sift through your finance options, and you can do this in consultation with our team of finance experts, who are available during working hours. Alternatively, click this application button to begin the process.

Asset-based finance 

Asset-based lending (ABL) is a way for established businesses to increase their cash reserves, improve the overall bottom line and avoid cash flow problems. By using assets such as accounts receivable, inventory, equipment, machinery, or real estate as security small business owners can borrow money by applying for a short term loan to cover immediate expenses.

Asset-based lending is a line of credit where funding is secured by collateral. The amount the lender agrees to give is based on the value of specific assets, such as inventory, owned by businesses rather than traditional business financing, where lenders assess a company's balance sheets, profitability, and working capital. As an alternative option to funding, it is attractive to prospective applicants, especially those operating in volatile markets or with an unstable cash flow.