4 Tips To Successful SME Cash Flow Management



It doesn’t matter how much profit the work you and your colleagues bring into your business if the cash from those sales doesn’t land in your bank account. Many people newer to running a business genuinely wonder why funders and investors seem so focused on cash flow when profit and turnover figures should be, in their minds and understandably, far more interesting.

It’s only when you run a business for yourself when you truly appreciate the importance of the cash available to you to carry out your daily trading activities. And, other than matters of taxation, business cash flow is by far the topic of most frequently asked questions by our clients here at Black and White Accounting.

In this article, we’ve provided a taster of the advice we give to our own clients, which you can take into consideration when managing your cash flow. These tips include:

  • Focusing on costs initially
  • Then focusing onto better revenue generation
  • Being clear on what’s business’ money, what’s your money, and what belongs to HMRC
  • Building up a “Doomsday Fund”.

If you want to learn more, why not book a free hour’s consultation with us today?

Focus on outgoings initially

It’s far easier to predict what’s leaving your account than what’s going to be coming in. In any business, there are three main types of cost – fixed costs, variable costs and exceptional costs.

We’ll describe these costs below but when managing cash flow, please do not pay any invoice due until the very last possible moment agreed with the other party. That way, you keep money in your account for the longest possible time without breaking your word to your suppliers and the other people & companies dependent on your business.

One of the key things when reducing costs is to ensure the savings you make are not visible to your customers, to such an extent that they may choose to buy their products or services elsewhere as the quality of them deteriorate to such a degree that your competitors become preferable. The majority of costs, however, are not visible so there is often still a lot of opportunity. If you do need to cut-cost which are visible to your customers, try and help them understand why, to reduce the probability that they might be lost (unless of course, you want to lose them). Another thing you can look to do if you cannot reduce the costs themselves is to lengthen your payment terms for them or spread the costs for example by direct debit to improve business cash flow.

Fixed costs

Fixed costs refer to those costs which you must pay regardless of your volume of sales or your ability to collect income from clients. Your business’ fixed costs are rent, business rates, professional services costs (accounting, HR, and so on), staff’s wages and so on.

When revenue and profit are high, many business owners become distracted from what they might see as the “tedious” responsibility of cost control as they, for completely understandable reasons, chase additional revenue and profit. It’s much more fun chasing sales than it is going through a spreadsheet or cloud-based accountancy software.

However, revenue goes up and down and, for the times when revenues are down, it’s better to enter “cash preservation” mode and then the tightening of the belt in a downturn. The truth is that businesses should be in permanent “cash preservation” mode but we understand that’s not always the reality.

Make a list of all of the fixed costs of your business and decide which costs are justifiable and which ones are not. Where you cannot justify a cost, get rid of it (as long as you’re not breaking any contractual agreement with a supplier).

If you decide that certain employees are surplus to requirements, you will face a short-term hit to lay them off (including redundancy if they have been with you for over two years) but, in following months, you will see the savings. With staffing discussions, we would recommend you include your HR Professional into the conversation. If you do not have one, we would be happy to recommend one of our strategic partners to you.

Variable costs

Variable costs in a business are linked to the supply of your products and services. You can preserve more cash in your business by spending less with your suppliers.

If your business’ account is a significant account to a supplier, you may wish to ask them for discounts based upon the achievement of monthly volume targets. You may wish to consider approaching other suppliers with the same or similar products to the ones you’re already buying to judge whether what you’re paying now is competitive or not.

If you employ staff on commission, are the rates of commission you’re paying them too high? What do your competitors pay? Could you delay the payment of commission in case a customer who has been sold to backs out?

If you were to scale back the percentage rate at which commission is paid or raise the target required to receive commission, how much push back would you get back from your staff? It’s inevitable that you would get some but would the negative feeling from staff really persist?

Exceptional costs

Exceptional costs are costs that you pay to, for example:

  1. expand your business or increase its capacity; or
  2. you’re forced into paying.

Company expansion brings its own risks – especially increased future fixed costs. Increased fixed business costs mean that you’ve got to increase your revenue on a permanent basis to pay for the new staff, the bigger premises, and so on and it reduces your flexibility and how quickly you can evolve your business.

Is investment in the growth of your business really an exceptional cost? Many accountants might disagree but we think it qualifies as one because it’s a decision that you take and part of that decision is choosing how much you want to grow and how much you want to spend on that growth. It is not a regular day-to-day cost, except in certain very niche industries.

If you can, keep exceptional costs incurred in growth to a minimum by staging it rather than doing it in one big bang. By doing so, both the one-off costs and the associated increases in fixed costs are spread and more manageable.

The exceptional costs you’re forced to pay may come from refunds, from legal action brought against you, and other unforeseen and unavoidable expenditure, or due to restructuring on your business. There’s not much you can do about these except to provide your business with a buffer by building up your “Doomsday Fund” – more on that later.

Then focus on revenue generation

A very successful client of ours once told us that “a deal is a deal when the money is in the bank – any contracts signed or promises made are worthless until someone commits cash”. They are of course right.

Try to take money upfront

Many clients dislike taking money upfront, but please believe us when we say that you will be surprised, especially on smaller order values, how little resistance you get from a client when you ask for payment upfront.

It’s understandable that, on particularly complex, big-ticket, or multi-staged jobs, it may not always be possible to be paid for everything upfront. In these cases, ask to be paid upfront for the work involved in getting from one milestone to the next.

Allowing someone to pay in 30, 60, or 90 days turns you into a banker as well as a businessperson. You don’t walk into Tesco, do your weekly shopping, and tell the checkout person that you’ll be back in 3 months’ time to pay.

Please don’t put up with it – you’re better than that and your business is worth more.

Failing that, take a substantial deposit

If a client is reluctant to pay for everything upfront, insist on a significant deposit which at least covers your time and materials and allows you to make a small profit.

You might ask for 50% upfront, 25% on completion of the product or service, and 25% when the customer signs off the job as complete. Again, you will be surprised by the lack of resistance from most customers to this suggestion. In fact, most of them will wonder why they’re not making the same requests of their customers.

Be on top of every invoice by investing in invoice software

As soon as work and payment terms are agreed, issue an invoice, especially if your client has agreed to pay you in advance or to pay you a substantial deposit. Get it out straight away and chase it up straight away. Shorter payment terms of say 7 or 14 days can also be helpful.

If payment is not immediately forthcoming, remind your client in the nicest possible way what they have agreed to and that you can’t start work on their job until you’ve received what you’re owed. It’s not personal, but if a customer finds they don’t have to pay you within the agreed timescale, it is likely to lead to repeat behaviour in the future which could cause even bigger problems.

If you are invoicing by milestone, make sure that the client is aware that payment is due on commencement of the work towards that milestone and not 30, 60, or 90 days after completion of the milestone.

Make sure you regularly know which invoices are becoming due and which ones are overdue and take the appropriate action. Using cloud-based accounting software can make this infinitely easier. Using an app such as Chaser can also automate this.

As a business, accept debit and credit card payments

According to Xero, British companies issuing invoices for future payment will be paid on average 38 days later if only bank transfer and cheque options are offered.

If you offer the option to pay by credit or debit card, that time drops to 19 days – half the time. Ask us about how you accept debit or credit cards when you get in touch.

Failing that, factor your invoices

Another option to bring in revenue faster is to factor your invoices. If you are unfamiliar with factoring, you are paid on the invoices you issue to clients almost immediately by the factoring company.

You sell the value of the invoice to the factorer who initially pays you between 80-90% of the value of the invoice. When the customer pays up in full, you receive the balance minus the factorer’s fees. Factoring costs are similar to the costs of taking credit cards.

There are dozens of factoring companies to choose from in the UK. When seeking one, try to find one which does not require you to:

  • sign a personal guarantee making you personally liable for debts uncollected if your business becomes insolvent and
  • sell them all your invoices (it should be up to you which invoices you wish to sell and which ones you don’t).

This is an area of finance which is evolving quickly, thanks to challengers such as MarketFinance, making it a more attractive and potentially workable solution.

If you don’t want to do this, you can also use a debt collector or recovery company. However, you need to be careful not to damage your relationship with the customer in question.

Be clear what’s business’ money, what’s your money, and what belongs to the HMRC

Always be careful to make sure that there is no confusion over which money belongs to you and which money belongs to your business, especially if you are running a limited company. Some clients of ours have multiple business accounts each for Corporation Tax, CIS, PAYE, VAT, client funds etc. Don’t over-complicate this, but having more than one bank account can help keep things clearer in your head.

Keep personal and business bank accounts separate and, when you want to pay yourself, make sure that you transfer money from your business account to your personal account.

If you’re drawing a dividend, make sure that you complete the necessary paperwork and that you check that there is enough retained profit in the business to take that money out. We can of course help with all of this.

Create an emergency “doomsday” fund

You should also set up a savings account into which you transfer:

  • 25% of the net profit you make every month for corporation tax if you run a limited company;
  • 30-55% of the net profit you make every month as a sole trader or a partner depending on the rate of income tax you pay; and/or
  • 15-20% of the value of each invoice if you’re VAT registered to make sure that you’re able to meet your VAT liability when due.

Try to work out how much running money you actually need a month and transfer the surplus into your business savings account  – in an ideal world, you should only draw money down from your savings account when you need it and you should have three to six months of money to at least cover your fixed costs if everything goes wrong.

Help with cash flow from Black and White Accounting

Although the suggestions in this article are generic, they can be applied to nearly every business. We understand however that many company owners want an accountant to run through their books to look for opportunities to improve their cash flow management.

We’re offering new clients an hour’s free consultation with one of our accountants and business advisors. Let us find out about you and your business so that we can:

  • help you identify cash flow management opportunities within your business;
  • understand if you are the right business structure to optimise cash flow;
  • discuss if there are tax opportunities to optimise cash flow including on VAT and PAYE;
  • consider if debt or equity instruments could assist your position; and
  • provide you a quote with a selection of the service we offer that, after meeting you, we believe would add most value to your business.

For help and support planning for the future, please call us free on 0800 140 4644, or email [email protected]. We look forward to hearing from you.