Annie Button, professional content writer and branding aficionado, explores the importance of steady cash flow for small businesses.
Cash flow is something that is often overlooked or not understood by small business owners as they grow. As smaller businesses grow, their bills will naturally get larger. This means that it becomes necessary to have enough money at the specific times that the company needs it. Knowing that your business will have enough money in two weeks is not enough if the bill has to be paid today.
Running out of cash is not just problematic in that it can affect productivity and the work businesses can do, but it also puts SMEs in danger of failing. Even successful SMEs making a reasonable profit can find themselves in difficulty if they don’t have the cash available to pay bills or make purchases when they need them.
Here we take a look at issues relating to cash flow and what your SME can do to make sure you have money at the right time.
Common cash flow problems
It is important first to understand the problems that often get SMEs into trouble with regard to cash flow. If businesses similar to yours have fallen into these traps then there is a chance that the same could happen to you. Some of the most common problems include:
- Overlooking overheads – some costs seem like they are an inevitable part of running a small business – but you still need to account for them. Issues such as the rising cost of premises, business travel costs, and perks such as car leases can eat into your finances at an alarming rate.
- Failing to prioritise collecting receivables – some startups and smaller businesses don’t understand that some challenges arise simply out of customers and clients failing to pay in a timely fashion. You need to keep a close eye on what is owed to you, and how long you have been waiting for payment.
- Not having a cash flow budget – a cash flow budget is an analysis of the money that you expect to have coming in and going out over the course of a 30 day period. Something as simple as this can make it much easier to track and follow across the month.
Cash flow vs. profit
It is also a common mistake that businesses assume that making a profit means a good cash flow, but it is not necessarily the case. Profit and cash flow are two very different things; profit refers to the money that a company has after it has deducted its outgoings, while cash flow is the money that is coming in and out of the business at any given time. In general, a lack of profit leads to cash flow problems, but making a profit doesn’t guarantee smooth sailing.
Build strong relationships with your suppliers
One of the most effective ways to mitigate potential cash flow problems is to build strong relationships with your suppliers. Pay your bills on time and in full, and work to get a situation where your supplier thinks of you in a very positive way. Your goal here is to get to the point where if there ever is an issue with cash flow, you have enough good grace with your supplier to put off payment for a little while until your cash flow improves. That’s not to say that simply deferring payment is a good solution, but if cash flow problems do arise, buying yourself a little time is always a positive.
Take advantage of tax incentives
Of course, one of the best ways to deal more effectively with cash flow is to get more money coming into the business. Some small businesses miss important ways of doing this. A great example comes in the form of research and development (R&D) tax credits.
“The average R&D tax credit claim for SMEs is around £55,000, but many eligible businesses are still failing to claim,” says Simon Bulteel of Cooden Tax Consulting “thousands of small businesses are missing out on money that they are owed, either because they don’t realise that they are eligible, or they think that claiming for R&D tax relief is something only big businesses can do”.
This shows the kind of potential cash that can be injected into an SME through legitimate channels.
Whether it is through growing too quickly, natural seasonal fluctuation in the market, or simply bad timing, any small business can face cash flow problems. That’s why it is so important to be proactive and take steps such as keeping a close eye on incoming and outgoing money and building better relationships with your suppliers.