“Why is my cash flow always so tight?”

It’s a question I hear often, so don’t worry, you’re not alone!

Businesses thrive or fail on the state of their cash flow. It’s no good working all the hours if you’re not in control of your finances.

It’s a common issue with small businesses. Many business owners have their finances looked after by a bookkeeper, (smart move) yet don’t then use the information to control their business finances.

It’s like having a pair of spectacles but not using them!

So, if cash flow is tight, it’s for one or a combination of the following reasons:

• Sales price versus cost price – are your margins large enough?
• Insufficient orders to cover the cost of your overheads
• Debtors are taking too long to pay
• Creditors are being paid too soon
• Poor credit control
• Poor tax planning
• Growing too quickly
• Operating inefficiently
• Too much money tied up in stock
• Lack of investment into time saving technology

The net result is, there’s too little cash in the bank to meet your financial obligations, and it then becomes a time consuming game of robbing Peter to pay Paul, time that should be spent looking after your customers.

Does this sound familiar?

If so, it’s time to look at all of the possible causes listed above to see where improvements can be made. So here are a few tips and searching questions to help improve the situation:

Increase sales without increasing overheads to improve your profit margins. Can you cross sell other items to existing customers, or offer a discount for larger orders? There could be some quick wins here.

Reduce overheads – are there any fixed costs that you can cut or renegotiate? Look at your rent, phones and utility providers to see if there are better options that suit your business.

Get paid more quickly – offer incentives for payment with order and be vigilant about chasing debts that fall outside payment terms. Educate customers that you have strict payment terms.

Negotiate longer payment terms with suppliers, to give you more time to receive money from customers before you have to pay suppliers.

Credit check all new accounts to protect against bad debts and be clear about payment terms on quotations and invoices. Apply credit limits to new accounts, and be strict about adhering to them.

Remember to plan for taxes, keep a financial cushion in the business so that it’s not left short when a vat bill or corporation tax bill is due. A separate bank account for tax, one that attracts interest, is a good idea.

Look at your operations – can they run more efficiently? Can you increase the use of capital equipment to get a better return? Are your staff properly trained and productive?

If you’re growing too quickly, this can lead to gross inefficiencies. Throwing money at a problem to meet a deadline can mean you end up losing money instead of making it. Remember to plan and stay in control of costs.

And take a look at the money you have tied up in stock, and the number of days it takes to turn over that stock. Can you reduce it? Can you negotiate smaller deliveries with suppliers without paying more per item? And if you have unpopular items on the shelves that aren’t worth holding, discontinue the line. Streamline your stock control to free up some cash.

And take a look at the competition – are they thriving where you struggle? What is it they are doing differently? You could learn something.

Have you invested in the latest labour saving devices? And if you’re paying lots of overtime, it may be time to take on more staff. Or if your business has seasonal peaks and troughs, take on temporary workers to control wage costs.

Look also at costs in the business that are not directly related to sales. Are your getting a return on your investment in marketing? Are you getting good value for money from your professional advisors? Be shrewd, and be demanding – see what difference it makes.

There are lots of tips and questions, but the answer to your cash flow issues will be in there somewhere. A methodical approach to the finances of your business will pay dividends – quite literally!

Make a start today, and if you need a hand, we’re here to help, with expert financial planning advice from our resident Chartered Accountant Julian Portch.

And one last point to make – if your business is running on rails financially, you spend less time juggling finances, and more time doing what you’re good at – looking after your customers! Make it your goal, you won’t regret it!