But the bittersweet feeling will not let go. It has been a tough month with high costs, and you know very well that the champagne can only be popped when your invoice has been paid. 30 days until due seems like a whole eternity, and the thought of a late payment is completely unbearable.
We hear about cash flow almost everywhere we go and it is probably one of the most frequently used business buzzwords. Why is it so crucial? Is there anything we can do to create a more predictable and healthy economy? We have gathered our finance experts to delve deeper into the subject.
What is cash flow?
Cash flow is money coming into your business and money going out of your business. This is distinct from profit, which doesn’t take into account business expenses, but focuses solely on money coming into the business.
Three in five SMEs report having experienced problems with cash flow, leading to problems paying, settling debts, and even taking on new work. With sky-high levels of inflation, rising running costs, and a deepening energy crisis, businesses of all sizes from all sectors are feeling the pinch.
“I think the more you understand your cash flow cycle, the more options you have, and the earlier and the more proactive you are with seeking advice, then it just gives you the ability to do something about it.”
- Josh Levy
Top mistakes SMEs make when it comes to cash flow
Too little focus on cash and forecasting
The main mistake is not focusing enough on cash.
“It's about getting the forecasting right. And I always say to my clients, you need to have a 13 week cash flow. It's more important than any other thing that you can do from an accounting point of view, is to have a 13 week cash flow so you know what's happening in the next 90 days in your business.”
- Donald Boyd
Forecasting allows you to project forward with cash flow in mind to see how your business will be doing in the coming months. You’ll stay one step ahead, and get enough time to plan for what to do. Without forecasting, you end up focusing too much on the day to day.
Late payments
Late payments are something a lot of entrepreneurs struggle with. You might put 30 day terms on your invoices, but then you have to spend time chasing those clients that don't pay you on time.
Huge pressure is put on cash flow when the cash takes too long to come in. You can include it in your forecasting, but if the payback isn’t set to happen in another 60 days, the cash flow slows down when it’s at its most critical.
“A lot of SMEs are reluctant to chase their customers, and that can be a real issue. Hence why the outsourcing of credit control has become quite big in the last 10-15 years. ‘Cause actually the business owner doesn't want to go and chase a payment at the same time while trying to grow the business.”
- Josh Levy
The mistake here is to allow the waiting time to become too long. It can be awkward to ask someone to pay their bill to you, but what you are asking is absolutely reasonable.
Which sectors are most affected?
The traditional service sectors of manufacturing, engineering, and construction, which tend to be trading on B2B terms with invoicing and payment, are very much affected. But we're seeing the effects particularly in anything consumer facing, where the consumer is the endpoint in the value chain. These are under pressure because of inflation.
“And yet it hasn't fully played out in the consumer's eyes yet. So whilst the consumer's under pressure from rising utility costs, mortgage rates going up, and just general inflation and some uncertainty around that, it's not yet hit retail spending and hospitality spending in the way that it possibly will over the winter.”
- Josh Levy
Business owners have to raise prices to make up for outgoing cash flow. This leads to consumers choosing not to go to restaurants, bars, etc, and instead buy cheaper options. The cash goes out but not back in.
“Taking a step back and reviewing your business model, and actually seeing whether you're relevant for your customers, is important. Because more than ever, businesses need to continually reinvent themselves.”
- Donald Boyd
Skill shortage
Many businesses are unable to fill their vacancies, so even with good cash flow, there are supply chain issues, customer inflations, funding, and lack of people to grow your business. Businesses have to pay more to recruit and keep their skilled workers. Accelerating peer reviews by as much as six months is becoming more common, with January pay rises happening as early as June.
But still, it's the beauty of the SME market that I found over my career. How resilient they are because they're able to pivot and they're able to reinvent themselves and change their business model when times are tough. Which, if you've got a much larger business, it's very difficult to do so. If you've got a small business with 20, 30 members of staff, it's relatively easy to restructure that, and to get the right business model with the right people and the right advice and the right funding partners around you.
- Donald Boyd
What can you do to improve the situation for your business?
“If you're a business owner, you do yourself a huge favour by embracing technology wherever you can. It allows you to pay monthly without a bookkeeper, via your cloud-based software, used similarly to your bank account. You can do the bookkeeping on your phone. It just leaves very busy entrepreneurs with more time to spend on doing what they love.”
- Josh Levy
- Get a good financial advisor
- Get an accountant that can help you with credit scores and cash flow.
- Have a 13 week forecasting plan (90 days).
- Focus more on cash flow over profit.
- Be aware of where you stand in the value chain, and stand your ground when it comes to your terms.
- Nurture connections and network with advisors, funders, and the local business community.
- Find business support that suits your business.
- Research free tools like credit rating agencies.
- Invest in technology and automation.
“You can offer a very little discount if somebody pays within a week or two weeks rather than 30 days, when you're dealing with a high volume customer. And this can be quite critical to your business. If you can get paid and settled within seven days of that invoice as opposed to 45 days or 60 days, that's more cash that you can then use to pay your supplier, or use for other expenses. And before you know it, you produce more, and you sell more.”
- Donald Boyd
Current economic conditions might not be ideal, but there are new opportunities for SMEs to grow. With focus on budget and cash flow, networking and automation, you can do a lot of good for your business.