Cash flow is the lifeblood of any business. You can be profitable on paper but still face serious problems if cash isn't flowing smoothly.
Understanding Cash Flow
Cash flow is the movement of money in and out of your business. It's different from profit—cash flow tracks when money actually arrives or leaves, whilst profit measures revenue minus expenses on an accounting basis.
Good cash flow management enables you to pay suppliers and employees on time, invest in growth, build emergency reserves, and secure better credit terms.
Common Cash Flow Problems
- Late-paying customers: Invoices not paid on time
- Excessive stock: Too much cash tied up in inventory
- Overtrading: Growing too quickly without sufficient cash reserves
- Seasonal fluctuations: Revenue varying significantly throughout the year
- Unexpected expenses: Emergency repairs or equipment failures
Practical Cash Flow Strategies
1. Forecast Regularly
Project your cash position for the next 3, 6, and 12 months. Anticipate when payments are due and identify potential shortfalls in advance.
2. Invoice Promptly
Send invoices immediately after completing work. Ensure they're accurate and clear with payment terms prominently displayed. Follow up on overdue invoices promptly.
3. Negotiate Payment Terms
Request deposits from customers, offer early payment discounts, or use direct debits. With suppliers, negotiate extended payment terms where possible.
4. Control Expenses
Regularly audit expenses, cancel unused subscriptions, and renegotiate supplier contracts. Implement approval processes for large purchases.
5. Use Technology
Cloud accounting software provides real-time visibility of your cash position, automated invoicing, and cash flow forecasting tools.
Dealing with Cash Flow Shortfalls
If you face a cash flow crisis, act quickly. Short-term options include overdrafts, invoice factoring, or asset finance. For medium-term needs, consider business loans or explore government support schemes.
Learn more about business finance options at GOV.UK Business Finance Support.
Warning Signs
Watch for red flags like regularly needing to use your overdraft, difficulty paying bills on time, increasing debtor days, declining bank balance, or needing to delay payments to HMRC.
How We Can Help
Optima Accountancy provides comprehensive cash flow management support:
- Cash flow forecasting and analysis
- Cloud accounting setup and training
- Regular management accounts
- Working capital advice
Contact us for a free cash flow review and personalised advice on improving your business finances.