Cash has always been king in running a business, especially when SMEs typically only have a 27 day cash buffer, according to JP Morgan.
So as businesses struggle to cope with the effects of the coronavirus pandemic, we look at four key areas in maintaining a positive cash flow.
Measure your position
Thinking about the markers along a river bank, they show when the water is running dangerously high and about to flood, or when there’s not enough and it’s about to run dry. In a similar way, you need to be able to measure your position. You need to know how much cash is in the business at any one time. What is your working capital? Have you invoiced all your clients who are due an invoice? Have you any invoices which are overdue? How much stock are you holding? Could you postpone or cancel any orders with suppliers?
Once you have a clear picture, you can start to create a cash flow forecast and make appropriate plans. It will be clear whether there is enough money in the business to pay the bills, cover the wages and meet any supplier costs or other overheads. If necessary, explore whether there’s any flexibility on loans or credit.
Invoice promptly
As the name suggests, cash flow is all about ensuring there is enough money flowing into the business. But when you’re busy doing the actual work or handling various crises, it can be easy to overlook the paperwork. One of the chief ways of getting money in, though, of course is to make sure you’re invoicing your clients for any work as soon as it’s done. The longer you wait, the longer your bank account will be without those vital funds. In addition, if there are any queries over payment, they’ll be easier to sort out if there has not been a long time lag.
Cut costs
We’ve looked at improving the way money is coming in. Are there also ways you can minimise the amount of money going out? Scrutinise your monthly, quarterly and annual overheads. Is there any way you can cut back on your rent. Would changing utility suppliers, cancelling subscriptions or renegotiating interest on loans save some money? Think about leasing certains items such as computers, vans or cars rather than buying. That way you benefit from the latest technology. With vehicles, in most cases you should be able to deduct the lease payments from your taxes as a business expense.
Explore ways to legally reduce your tax bill
It’s important to talk to your accountant about whether there are areas where you might legitimately be able to save tax. Look into the various tax reliefs on offer too. For example, if you’ve recently developed a new product or service or upgraded an existing one, you might be able to apply for an R&D Tax Credit. This scheme is open to all UK businesses of any size in all industries. It offers a reduction in Corporation Tax as a reward for innovative research and to pay for some of the development expenditure. The way the credits are calculated means it’s still worth claiming even if your company is making a loss.
