Effective cash flow management is crucial for SMEs to ensure business stability, growth and resilience against unexpected financial challenges. So with a new year ahead here are some useful steps to consider when considering cash flow:
1. Create a cash flow forecast
Creating a detailed forecast allows cash inflows and outflows to be predicted over a specific period (weekly, monthly or quarterly). Consider best-case, worst-case and most-likely scenarios to prepare for any uncertainties. Finally understand break-even points and adjust pricing or cost structures if necessary.
2. Keep on top of accounts
Send any invoices promptly to reduce any delays in payment. You might want to offer early payment discounts or enforce late payment penalties to ensure invoices are settled on time. And don’t forget to run credit checks on new customers and set clear credit terms to reduce bad debts. Fostering loyalty with existing customers can also help.
3. Manage suppliers
It can be useful to work closely with suppliers to negotiate longer payment terms without incurring penalties. Always pay critical suppliers on time to maintain strong relationships. And if cash flow allows, take advantage of any supplier discounts for early payments. Building relationships with suppliers can mean more favourable payment terms and the likelihood of support during downturns.
4. Maintain cash reserves
If you can, keep a portion of funds as a safety net for unforeseen expenses or revenue shortfalls. If you are planning some reinvestment do try to balance your cash reserves with any outlay you need to make for growth. Don’t overstretch your business!
5. Optimise stock management
Avoid overstocking by keeping inventory levels in line with demand. Just In Time practices can help reduce holding costs and free up cash too.
6. Reduce unnecessary expenses
Have a good look at your costs to identify and remove non-essential expenses. One area to consider can be energy bills – energy-saving technologies can help cut costs.
7. Use technology
Accounting software such as Kashflow, FreeAgent, QuickBooks or Xero can be useful for real-time cash flow tracking and management. These systems can also help with day-to-day operations such as automating recurring payments and reminders.
8. Consider financing
If things do get sticky make sure you have a business line of credit to cover short-term cash flow gaps. Invoice factoring or financing can help with immediate cash from unpaid invoices. And there may be government grants tailored for SMEs.
10. Work closely with your accountant
Keep in touch with your accountants or financial advisor for guidance on cash flow management. Perform regular audits to identify areas for improvement and mitigate risks too.
Implementing these strategies can help create a more stable financial foundation whilst reducing risks, putting your SME in a good position for sustainable growth.