When times are tough for small business owners, managing cashflow can be the key to staying afloat until conditions improve. With the ‘cost of doing business’ soaring due to record levels of inflation, here are some tips to help you manage your cashflow effectively.
Keep track of your cash
Even if your business is profitable, you still risk running into difficulties if you don’t pay close attention to the cash you have available to pay bills and wages. If a customer pays an invoice late, you may suddenly find yourself unable to cover a bill or an expense and end up in trouble.
This is a particular risk if your business has regular expenditure - for example, a restaurant may need fresh supplies every day. Even a profitable business can struggle if the profit is all in the future and there’s no cash in the bank today.
Make sure you have a clear view of your short-term cashflow, which includes when you need to pay bills and when money will come into your bank account from invoice payments or sales. The key here is to avoid surprises.
FreeAgent can help with this because it automatically displays a three-month cashflow forecast based on your accounting data. You can also create your own longer-term cashflow forecast by downloading our cashflow spreadsheet and following the instructions.
Speak to your suppliers
If you simply neglect to pay a bill on time, a supplier is likely to be unhappy. However, if you know in advance that a payment is going to be difficult, it’s worth speaking to them to see if you can arrange a payment extension.
If you have a good relationship with your supplier and you use them on a regular basis, they may be willing to extend payment terms occasionally to help out. In most instances, if you make a request and discuss the best approach, this will be received much more positively than a missed payment.
Look at late payers
Do you have a few usual suspects in your customer base who pay their invoices late? Late payment of invoices can have a big effect on your cashflow, especially if you tend to invoice at a certain time of the month, meaning most of your invoices are due at the same time.
If you use FreeAgent, you can use the Insights functionality to see who your late payers are. If you don’t have accounting software to help, take a look back at your bank account to pull out this information.
Be proactive and email your late-paying customers to remind them of their next payment date and ask them to pay on time. Sometimes a nicely worded reminder can make all the difference. FreeAgent can send payment reminders automatically, but if you don’t have software, a personal email will work just as well.
Cut your costs
Are there items you currently pay for that you can do without or source cheaper? Take a good hard look at all the bills you pay on a regular basis and see if you can just eliminate some costs entirely by doing without a service.
Do you have surplus stocks but still have an item on repeat purchase? If you’re in retail or hospitality, are there other suppliers you could approach to cut a better deal for your regular purchases? Try to trim all your costs down as much as possible - these tips for cutting back on small business costs can help.
Expand your customer base
Marketing activity may be the last thing you feel like doing if you're facing a cashflow issue. However, making sales is the easiest way to bring cash into your business - and not all marketing has to cost money.
Try emailing or speaking to your existing customers and asking if they can recommend you to anyone in their network looking for your type of service. Post on social media or send direct messages to potential customers on LinkedIn.
If you have a business with premises, why not create some cheap flyers to distribute in your local area and offer a promotion? Even a small discount can bring people in. Consider offering a repeat purchase promotion that guarantees you a certain number of full-price sales before you discount. Spend as little as possible and be creative.
Change your payment terms
If you offer 30-day payment terms on your invoices, why not consider a change? Ask for a deposit up front for your work or adjust your terms so that you receive a payment partway through work if you offer a service. Changes like this can bring in cash quicker in the short term, which could tide you over during a period of difficulty.
Keep on top of your obligations
Not staying on top of your obligations to pay tax, VAT and PAYE can be one of the easiest ways to end up in trouble with cashflow. This can result in money falling due without you being fully aware of the scope of the payment, and it could lead to fines if you fail to pay on time. Keeping on top of these obligations means you can account for payments or arrange to spread costs if you have cashflow issues.
Make sure you’re keeping up-to-date records, either with software like FreeAgent or using your own process. FreeAgent also includes a Tax Timeline on its Overview screen, which can give you a forecast of when tax payments will fall due and how much you are likely to owe. This can be very helpful when you’re trying to keep on top of cashflow.
Speak to your bank
When all else fails, it’s worth speaking to your bank, particularly if your business has been running for a long period of time and has good financial records. Your bank may be able to offer you a temporary overdraft facility, or even a loan, if you’re able to show a clear plan for how you intend to move your business forward.
An overdraft can be particularly useful if you can demonstrate that you’re in temporary difficulties that will resolve in the future - especially if you can clearly show revenue coming into your account. Your bank can also be an excellent source of advice.
Don’t despair if things sometimes feel bleak when you’re facing cashflow issues. Try to remember why you started your business in the first place and believe in your vision. With careful planning and the right strategy, you’ll give yourself the best chance of moving forward into future success.
Disclaimer: The content included in this blog post is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this blog post. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.