This year, the full impact of Brexit and the rising cost of living has put many business owners in a challenging position to improve their cash flow. As we all know, cash flow is critical to a business, particularly during economic difficulty.
So, we've put together this handy guide to help business owners to improve cash flow in 2023.
1. Where is your cash flow now?
To improve something, you need to understand where you currently are. Where is your cash flow now? Make sure to be evidence-based. Look at your past performance, including your sales and customer behaviours, and consider how that might change this year.
- When was the last time you scrutinised your cash flow forecast?
- Have you evaluated your sales process and metrics?
- Are you clear on any changes to supply costs?
- Have you got the right balance between price and quality in your supply chain?
Once you understand where you are, you can take the proper steps to improve your cash flow.
2. Have cash flow as a critical KPI
A fundamental approach to maximising your cash flow is to measure it.
Every company should have cash flow as one of its SMART KPIs. It is vital to your business's financial health and must be monitored. This means you need to keep an up-to-date forecast (see step 6 of this guide) and understand your critical requirements and costs.
3. Look to improve the speed of your payments
There's nothing worse than not having money in the bank when you've provided the service already. Therefore, in 2023, look to improve the speed of payment. Consider your options; could payments be staged, or "payment plans" be introduced to regularise cash flow streams? Another avenue is to collect the payment of invoices via direct debit so you're not waiting on a customer. You could also consider a subscription model to improve profits.
Additionally, look for opportunities to pivot your business model. Business owners should always be prepared to seize opportunities. Look for opportunities with a high financial impact (profit margin) and a low organisational impact/cost that can be accomplished in the short term. There might be low-risk, high-impact projects to pursue, while longer-term projects need to be furloughed.
4. Examine for unnecessary expenditure
Look to reduce your business expenses.
You can start being savvier about your outgoings and ask yourself which costs could be cut. Of course, motivating and looking after your people is essential, but consider what expenses are appropriate rather than just signing them off. Or ask yourself - is a service you're using, such as an online tool or a supplier, the most competitive market? Try to examine everything you're spending and regularly go through it with a magnifying glass to avoid waste. That will significantly help to improve your cash flow.
5. Consider short-term lending
Factoring or other forms of short-term lending will allow bottlenecks or known financial pressure points in your business to be worked around without high cost. Locking in debt at low interest rates will serve you in the long term and the immediate future by deferring your outbound cash flow.
We recommend seeking a financial adviser who could advise on a range of options.
6. Improve your cash flow forecasting
Your cash flow forecast will let you know how healthy (or otherwise) your business is now and will be in the future. It is vital that you don't see a cash flow forecast as a one-off exercise but as something that must be updated and maintained to give you an ongoing understanding of your cash position.
Don't forget that not all flows are regular – remember to include your estimated annual Corporation Tax payment and your quarterly VAT payments. Insurance payments may be an annual charge – forecast them or possibly even consider paying on a monthly basis to soften the impact on your cash.
Too much time and effort can be spent forecasting too far in advance, where uncertainty begins to lessen the usefulness of a forecast. Forecast an appropriate time ahead, e.g. a 12-month rolling forecast may work for your business. If, however, your business has long-term projects, or requires significant capital investment, then a multiple-year forecast may be better for you.
Some great software options to automate your cash flow may already be available in the financial accounting package you use in your business. Either way, making use of automation here can save you time and effort.
You also need to factor price inflation and other cost increases into your forecast. This can have a major impact on your cash flow. 2022 is set to see higher inflation than we've had in many years, alongside increases in the Minimum Wage and National Insurance contributions, all of which will impact cash as well as your bottom-line profit.
It's time to take control of your cash flow forecasting with this free webinar from TAB.
7. Keep marketing and selling
Unsurprisingly, your cash flow will improve if you sell more and the rest of your costs are stable. Your marketing budget should not be one of the first items on the expense chopping block. More than ever, times of economic strain are when you should lean into creating an effective marketing plan. Tap into the current pain point for your customer base and find innovative ways to solve their problems.
Last month, Andy Bounds, author of The Jelly Effect, spoke at our international conference. He said to focus on your 'afters' - what will your customers benefit from after using your product or service? Look to weave that into your communication strategy.
Companies that clearly understand customer needs, and pivot to adjust strategies, products, and services in response to shifting demand, are more likely to flourish both during and after a recession. By listening to your customers, you'll find new opportunities and quickly adapt your marketing and sales efforts to capitalise on them. Your cash flow will thank you for it.
8. Get a support network
Cash flow is one of the biggest challenges business owners must tackle. In a recent LinkedIn poll, 44% of people said it was their most significant financial challenge. It's also difficult to know if you're making the right decisions regarding improving your cash flow.
So, we would recommend that you seek the opinions of others. This might be through a peer advisory board, like one here at TAB, an excellent financial adviser, or your board of directors. By coming together with people who will understand your cash flow dilemmas, you're more likely to maximise your cash flow potential in 2022.
Read Anna-Marie Eardley's story. Through an introduction from TAB, Anna-Marie got a new financial consultant. This helped her to streamline her business' crippling accountancy costs and other company outgoings to improve financial performance.
Don't tackle cash flow alone – seek the support of others!
Additional resources
To get a real handle on your cash flow, we recommend The Economist Guide to Cash Management by John Tennet. It thoroughly explains six critical aspects of adequate cash and cash flow management.
Struggling sales, the difficulty in improving your cash flow? Read our business guide: Top sales challenges for SME business owners.
Consider our guide for the current economic climate: nine steps to protect your business.
And finally...
A tip from Allen Munro, a TAB member and director at Interpath Advisory.
"The old adage of “Cash is King” has never been more relevant in these uncertain times and visibility is vital.
Robust, accurate cash flow information underpins operational, tactical and strategic decision-making, so a business with powerful short-term cash flow forecast tools and controls will always stand a much better chance of success.
For example, the ability to see the impact of contracts won or lost, on cashflow allows businesses to make better, well-informed decisions and can help prevent the cash shortfalls that evercompanyss wants to avoid."
Thank you to these contributors to this article: Helen Mill, Ed Reid, Peter Harris, Jonathan O'Shea, Mags Fuller, and Allen Munro
