How to improve cash flow

Cash flow is the lifeblood of any business, regardless of size. So, if you’re just starting out or you already run an established SME, this blog will give you some tips on managing cash flow effectively.

Not having the money to pay business expenses on time can be stressful — 71% of small business owners have lost sleep over issues with cash flow. Cash flow problems can stem from late invoice payments, unexpected bills, poor sales, increasing production costs — the list goes on.

If not rebalanced, poor cash flow can quickly spiral out of control, sometimes costing you your business — a business you’ve worked so hard to get up and running.

Keep reading for tips to improve your business's net cash flow.

What does it mean to improve your cash flow?

Cash flow is the money you have coming in versus going out. You're in a sticky situation if you have more money going out than you’re making. You need positive cash flow to help you run a thriving, successful business.

So, by improving money management, you can ensure that you have the funds necessary to invest in new opportunities, hire more staff when needed, buy stock to take advantage of trends or seasonal peaks, and ultimately sleep soundly without worrying about money availability.

5 ways to improve your cash flow

If you’re wondering where to start, here are five methods to improve cash flow management.

1. Understand your income and expenditure

The first step to improving your cash flow is understanding what money you’ve got coming into the business and what you’re paying out. From here, you can accurately forecast cash flow, making it easier to plan for slower months.

Business income — Check all income sources to understand exactly what you have coming into the business. Look over the last year to pinpoint seasonal changes and understand trends and patterns in customer behaviour. This will help you plan for slow periods before they happen.

Business expenses — Look at your outgoings — wages, stock, bills, rent, raw materials, etc. Understanding these expenses will help determine where you can cut costs or increase product or service prices. Look for more competitive supplier deals and identify unnecessary expenses, i.e. duplicate or stagnant subscriptions.

When you’ve analysed both income and expenses, you’ll notice there might be periods where expenses are higher than income. This gives you a starting point to help you determine why this imbalance exists and the foresight to make changes to counteract it.

2. Tighten spending controls

You want to empower employees to spend company money if it contributes to the bottom line, but at the same time, you need to closely monitor spend across the entire organisation to keep tabs on cash flow. Using corporate credit cards can help you implement spending controls, including spending limits and expense-type limits, i.e. only giving some employees permission to purchase online subscriptions.

You can also consider creating a spending policy for employees to adhere to. Educate employees about how to expense correctly and which expenses are allowable, and share a preferred suppliers list to ensure you’re all on the same page when it comes to spending company money.

3. Explore your financing options

Sometimes, accessing business finance can help solve your short-term cash flow problems. By applying for a business loan, you can quickly access the money you need to pay bills on time or fulfil large orders without worry.

If you're in an industry such as buy-to-let development, it can be expected for there to be a lot of upfront costs before the revenue comes in. Business finance can help scenarios such as this.

Accessing finance allows you to take advantage of bulk-buy discounts from suppliers, improving your supplier relationships at the same time. Of course, there are plenty of other ways to raise working capital, like seeking investment or applying for a government grant. Consider all your finance options before submitting an application.

4. Improve your invoicing process

Although you can’t control when people pay you, you can limit working with problematic customers and carefully choose who you work with. Credit check all new suppliers and a process to effectively chase debts. Consider implementing discounts for early invoice payment or offer different incentives and rewards to encourage prompt payment, and don’t forget to invoice as soon as possible. Delaying sending your invoices only means payment is further away.

5. Lease equipment instead of buying it

Buying machinery and other necessary equipment outright can be expensive. And, before you know it, your cash reserves are depleted, and your equipment needs upgrading again.

By leasing equipment, you spread the cost over months or years instead of immediately losing a large portion of working capital. Leasing also means you can keep it or upgrade it to the most modern version at the end of the agreement.

Key takeaways

Many successful companies face cash flow problems, so if you’re struggling to manage cash flow, you’re not alone. Forecasting cash flow accurately is the first step to maintaining positive cash flow; you will never have a clear picture of company finances without knowing your cash inflows and expenses across the business.

How can Capalona help? We work with UK lenders to match business owners with accessible and affordable finance — helping them meet their business goals quickly. If you’re looking for short-term cash flow solutions, read about our cash flow loans or get a free quote.