Insights

According to recent research, 69% of UK small and medium-sized businesses (SMEs) have reported significant pressure on their cash flow as a result of the coronavirus outbreak. [1] Added to this, late payments of invoices are causing problems for businesses, as 74% of business owners reported invoices due to be paid at the end of February have not been settled and were unlikely to be cleared before the end of March. This suggests many SMEs could be heading towards a cash flow crisis.

Understanding how to manage cash flow effectively and keep things running smoothly is essential for every business. Even when the economy is flourishing cash flow can cause many otherwise sound businesses to fail and during exceptional times like these, cash flow is likely to be difficult to manage even for those businesses that do not usually have an issue.

If your business is facing significant cash flow challenges, it may be possible to obtain finance to see you though a difficult time, an interest holiday from the bank on any borrowings and/or you may benefit from the HMRC Time to Pay scheme.

If possible, try and avoid getting into this situation in the first place by taking early action to manage potential cash flow issues.

6 common cashflow challenges

Here are 6 challenges a business might face when it comes to managing cash flow during the current Coronavirus crisis, with practical advice on how to overcome each issue.

Paying staff salaries on a weekly basis

In some industries it is normal to pay staff on a weekly or fortnightly basis. The downside is it results in cash having to be found on a weekly basis, which means a constant drain to cash flow levels. It is especially problematic when staff are being paid weekly and customers are on 30 days or longer payment terms. Or worse, if customers are not paying you because they too are experiencing difficulties – a very likely scenario now. If it is possible to move your staff to monthly payments instead and match customer payment terms, this will ease the cash flow burden.

Poor credit control function results in customers paying too slowly

Customers paying too slowly is probably the biggest reason why businesses can struggle with cash flow and now, with Coronavirus impacting practically everyone’s business, this could create big problems if not carefully managed. Having a good credit control function in place, which ensures that income is received on a regular basis and within credit terms, is absolutely essential. Consider having a dedicated person to take care of credit control or outsource it to a specialist in the short term – it is one less thing to worry about. Ensure the customer gets their invoice as quickly as possible in the first place and start following up just before the invoice due date, to ensure that if there are potentially going to be delays, you can plan ahead for them.

Over trading

Whilst increasing turnover is important, it should not be to the detriment of cash flow. It might feel good to be generating high revenues but remember the saying – “turnover is vanity, profits are sanity, cash is reality”. When a business is chasing turnover but incurring costs up front and the payment is not received until a significant period after, then the bigger the turnover gets, the bigger the cash flow deficit will become. Where possible try and get advance payment and ideally out of pocket expenses paid at the start of a project – especially if you think the customer may be slow to pay you.

Buying capital equipment outright unnecessarily

It can be tempting to buy assets outright if you happen to have funds available, however it is not always wise to tie up capital. It may instead be more beneficial to use a funding facility such as hire purchase or bank loan – or lease the equipment so the cost can be spread over a period of time.

Minimise expenses and overheads

Where possible, try and keep fixed overheads to a minimum. This then gives you flexibility as you grow and means you can adapt to a changing market. For example, use outsourced services for HR, accounting etc. rather than having dedicated staff, which is then a fixed cost you are committed to. Having costs which are of a more variable nature means you can dip in and out of them as you need them.

Under-pricing for your products and services

In order to attract a client, it can be tempting to under-price for a job or service – after all some money is better than none at all. Short term, it might be helpful to secure some business and you could argue this is essential right now, but this creates problems in the longer term. For starters, it means your client will get used to paying less and it will make it harder to increase prices later on when things improve. It also devalues what you do; the client may be less likely to really appreciate the work because they see you as a ‘cheap supplier’, and it can create resentment in the long term.

Cash flow is the lifeblood of a business, but it is a balancing act - more so now than ever. The trick to managing cash flow well is to take a multi-pronged approach and seek improvements to a range of different things simultaneously. Work on the principle of marginal gains with small adjustments made consistently to result in a big improvement over time.

For personalised business advice on managing cashflow, contact partners@rjp.co.uk

[1] according to new insights from business lender MarketFinance