Why cash flow is so important

Why cash flow is so important

Cash flow is vital to small businesses and is often one of the biggest problems business owners face.

Even before coronavirus, problems getting paid on time was a major issue with some business groups campaigning against late payments. In fact, QuickBooks’ most recent The State of Payments report reveals 44% of customers do not pay SMEs on time.

It says that 38% of SMEs have had cash flow problems that have left them unable to pay their debts.

Most problems for UK businesses are caused by late payments. But falling sales and a lack of thorough cash management also play their part.

What is cash flow?

Cash flow is the total, or net, amount of money being transferred into and out of a business. It can be in physical cash or in other ways, such as bank transfers.

As a business adds to its cash flow it indicates that the company is adding to its reserves. This allows it to reinvest in the company or pay money to shareholders or to pay debts.

Cash flow includes all the cash generated by a company’s main business activities. At a basic level, is the business’s ability to create value for shareholders.

In simple terms, there should be more cash flowing in than flowing out! Cash flow is an important measure of the health of your business but it should not be confused with profit.

Late payments

According to a study by SME Loans, 78% of small businesses have to wait at least one month after their agreement terms before they are finally paid.

It also states that 40% of SME owners say that large companies are the worst offenders.

The Department for Business, Energy & Industrial Strategy says 24% of businesses of all sizes say late payments threaten their survival.

Late payments contribute to 50,000 small business failures a year. As well as the amount owed, it costs businesses three days a month to chase money they are owed, which is about £5,000 in working hours.

The key to success

Cash flow is key for all businesses, which is why late payments cause issues. Without the cash flowing in it is impossible to buy stock or invest in vital equipment.

It can also have an impact on the company’s financial risk profile, which may affect its ability to borrow and raise funds.

How to solve cash flow issues

  • The first thing to consider is what you’re spending. If your cash is flowing out more than in, check what you’re buying. It might be tempting to purchase new equipment that you don’t need, or to buy in services that you cannot afford.
  • Next, look at your customers’ ability to pay on time. If that’s the case you need to improve your credit control processes. If you do not have the time or resources to do this, then consider outsourcing the task to an expert firm. Sometimes paying for their services is covered by fewer cash flow problems.
  • What are your credit terms for customers? If they are out of sync with your suppliers’ terms you can often end up with a cash flow problem. If your suppliers want paying in 14 days but your customers’ terms are 30 then try renegotiating so they are the same.
  • Profits are not cash flow, but they do affect it. If you’re not making enough profit you will run out of cash. So consider your prices, increase sales or control your expenditure.
  • Lack of cash flow forecasting is essential. We can create these for customers but if you want to try yourself, we will give you some advice in our next blog. Forecasts highlight a lot of issues and if you can see the bigger picture it can help you with your cash flow.

Apart from these basic measures, there is a range of ways solve can flow issues. so if you would like our help don’t hesitate to contact us today.