A person swimming in a swimming pool.

Conquering the cashflow challenge

Cashflow is the 'lifeblood' of any business, so you need to keep on top of it to safeguard your growth.

Having access to sufficient finance is an issue that many businesses face when scaling up – and cashflow is just as critical to financing a growing business as generating new revenue.

However, by introducing just a few practical measures there’s plenty small businesses can do to help themselves to get on top of cashflow.

Anil Stocker, co-founder and CEO of MarketFinance, an online platform that allows companies to use outstanding invoices to raise funding, puts it this way: “Turnover is vanity, profit is sanity, but cash is reality."

Planning ahead

The first and simplest way to improve cashflow is to think ahead.

Jordan McCabe, who turned a childhood passion for showjumping into leading equestrian clothing brand Aztec Diamond, says: "The cash you spend today will impact in six months' time, so you have to plan in advance. I still just use an Excel spreadsheet that shows the money in and out each month."

Anil Stocker adds that every growing business should have someone who spends at least some time every week not only staying on top of cashflow but also thinking about how things can be done better.

Managing customer and supplier payments

Negotiating longer payment terms with suppliers or getting customers to pay earlier can improve cashflow significantly.

Gavin Sewell, CEO of 'reverse auction' insurance start-up Honcho Markets Ltd, says: "We've had more success on payment terms with younger, tech-savvy companies. Bigger operators often have their 60-day process and that's it. But it normally comes down to good communications and building trusted relationships."

Paying a supplier in 15 days when they’ll happily wait 60 days is usually of no benefit to a business and can tighten the cashflow situation considerably. However, it might be worthwhile if you can negotiate an early payment discount.

Tax payments to HMRC are often another big outflow for a business, but even here there can be some flexibility. Ask if you can have more time to pay if necessary, rather than assume it’s non-negotiable.

As ever, technology can make a big difference. Rather than waiting for customers to pay up, businesses can now take more control of payments. Many, like Aztec Diamond, sell directly to customers online so payment is immediate, while Direct Debits ensure money is taken automatically from a customer on a fixed date.

Credit control

Whatever the size of the company or stage of growth, chasing debtors will likely be a fact of life. Carl Swansbury, a corporate finance partner at Ryecroft Glenton, suggests many companies aren’t as successful as they should be in collecting debtors because their credit control team don't have the qualifications or experience to chase debts successfully.

Credit control is often deemed an administrative function when really it’s the 'lifeblood' of the business. "I think the importance of credit control is underestimated – without cash you have no business," he says.

However, it may be unwise to rely too heavily on a single big invoice being paid on time to bolster cashflow. Anil Stocker suggests entrepreneurs should have a back-up plan, with the ability to dip into funding sourced through an overdraft or invoice finance, if needed. “Don’t leave it to luck – take it into your own hands,” he says.

Funding growth

Rapid growth can put extra pressure on cashflow, but it’s crucial to continued expansion.

As Jordan McCabe remembers from Aztec Diamond's early days: "With limited capital, we'd place our order with the supplier, it would take three months to get into the UK and then we'd sell out. Then we'd have this frustrating period when we couldn't buy the amount of stuff that we knew we needed."

Jordan’s solution was to stagger payments. “I used to order X amount with the supplier – but then I’d only pay for half, and get them to hold the other half of it at the factory so I could pay as I needed the stock,” he says.

Carl Swansbury says that while scaling up a business inevitably makes demands on entrepreneurs' time, there still has to be a focus on cashflow so the company doesn't overtrade, run out of cash and fail.

Modelling future cashflows

To avoid cashflow risks, many businesses plan for the future with the help of a detailed financial model so they can predict their inflows and outflows over, say, a three-year period, and how that will affect revenue and profitability.

One major benefit of a financial model is that it can be used to access the additional funding a business often needs to support cashflow.

Carl Swansbury stresses that although there are plenty of external funding solutions now available, choosing the right one for your business is paramount. “There are two types of cashflow, and they should be looked at separately,” he says. “Growth and development capital, the structural investment a business needs as it grows, could be funded through private equity, VCT investment or debt. Whereas working capital, for day-to-day trading activities, could be funded using discount invoicing, factoring-type products or stock financing."

Anil Stocker advises growing businesses to talk to finance experts about the funding options that best suit the different stages of their development. For example, think carefully about raising equity for short-term funding: "You can’t get back the equity you give away and it might be better to give equity to people inside the company as an incentive."

Right systems, right team

The challenge for smaller businesses that are growing is often that they don’t have the resources to appoint a full-time finance director (FD). One solution is to attract the right professional talent by offering an equity incentive, ensuring your FD is as invested in the company's success as the founders. But for many businesses, bookkeeping and accounting, even the whole finance function, can be outsourced to a third party, leaving entrepreneurs time to focus on running their business.

At some companies, it’s the inefficiencies of their own invoicing system that’s costing them. For example, a business that is still manually printing out invoices to be sent in the post is losing out on the significant reduction in debtor days that automated electronic invoicing can bring.

As Andrew Lawrence, Barclays’ Head of SME Banking for the North East & Cumbria, says: “There's no doubting the importance of cashflow, and helping small businesses with their cashflow challenges plugs into the relationship banking we offer, face-to-face with our clients".

Quick tips for conquering cashflow

  • Keep on top of cashflow by planning ahead and have a clear picture of money coming in and out of your business
  • Negotiate with suppliers to get longer payment terms or find ways to encourage customers to pay earlier
  • Use a detailed financial model to plan for the future
  • Get advice about the best funding options to support cashflow
  • Ensure your business has the right accounting and finance resources, whether in-house or outsourced.

Conquering cashflow

How mastering cashflow management could help boost your business and give you peace of mind

From creating a plan to useful tips and resources, here’s how to stay on top of your cashflow.