Being able to identify cash flow problems and knowing how to overcome them is a crucial part of being self-employed. How well you manage your cash flow can make or break your business, and be the difference between financial success or struggle. But what can you do to improve your cash flow before problems arise?
Keeping your cash flow as fluid as possible is critical, giving you enough space to pay your bills on time without incurring additional costs – such as interest on overdrafts or supplier penalties.
So, whether you’re currently dealing with financial issues or simply looking to put precautionary measures in place, let’s explore some of the most effective ways to monitor your cash flow forecast, and keep it flowing.
What is a cash flow forecast?
Also known as a cash flow projection, this is a financial report which makes a reasonable estimation of your future cash flow over a period of time. The more information you put into it, the more accurate it’s likely to be, so include the details of all your income and outgoings.
Some of this data will be easier to predict, such as ongoing employee costs, whilst other areas might be more difficult – such as analysing current sales trends and predicting how they’re likely to continue.
What can I do to make cash flow forecasting more robust?
Improving data quality can make forecasting far more reliable, so it’s often useful to keep your records as up-to-date as possible. For instance, by entering transactions into your bookkeeping more frequently, updating salary changes in your records, and regularly reviewing your spending. We’ll go over a few techniques for this.
Stay on top of invoices and late payments
Unpaid invoices can put significant strain on a business, and cost many organisations a great deal of money each year. Making sure you are paid by customers on time (within your stipulated payment terms) is essential for cash flow, helping you to pay your own bills on time.
Customers who are consistently late making payments can also make forecasting and budgeting extremely difficult, because you can’t plan ahead properly.
Review your invoicing regularly, and send payment reminders before the deadline. You could even consider offering incentives for early payment or implementing late payment penalties to put a robust process in place.
Create and review financial reports
Using your accounts data to create financial reports is invaluable when it comes to improving cash flow and stabilising your finances, helping you optimise how you manage operations. It will also help you spot ways to reduce costs, capitalise on tax relief, budget better and head off potential cash flow issues before they become a real problem.
Financial reports allow you to see the bigger picture of your business’s performance, which you can use as a navigating tool to steer you in the right direction. Using fact-based data as a guide is a far better way to bolster your cash flow than operating on guesswork or reactive responses.
Be realistic about costs, overheads and expenses
It’s easy to underestimate how much it costs to run a business – it very rarely ever ends up being the case that you spend less than you expected, unfortunately.
This can lead to running out of funds faster than you’d like, which can put a serious dent in your cash flow.
Along with a realistic approach to your outgoings, it’s also important to review them regularly. Look for ways to reduce costs like rent, utilities, and employee salaries without compromising your business.
Some things you could consider as a way of keeping costs down:
- Outsourcing to contractors or freelancers instead of employing full-time staff
- Downsizing your workspace
- Implementing a remote or hybrid work model to lower overheads
- Switching utility providers for more cost-effective options
- Avoid overstocking inventory as it will tie up cash in stock and storage costs
Also make sure you’re assessing your allowable expenses on a regular basis to ensure you’re taking advantage of all tax relief available to you. An accountant will be able to help with this too.
Assess your pricing regularly
Getting your pricing right is one of the trickiest parts of starting and scaling a business. Once you have a pricing strategy set up, you should review it regularly to make sure it aligns with market conditions and competitor analysis.
This will help you maximise your profitability and support your cash flow. Keep a close eye on your financial reports and cash flow forecasts to carefully monitor your profit margins and ensure you’re earning more than you’re spending.
Many business owners are, understandably, trepidatious about increasing what they charge but when managed well, incremental price adjustments can be successfully implemented without alienating customers.
You just need to make sure you’re giving your customers value for money and not overcharging for what you offer.
Offer customers multiple ways to pay
Providing customers with multiple ways to pay for your product or service is a great way to support your cash flow – but not a benefit all business owners are aware of.
More ways to pay means more sales, or more payments made on time – resulting in healthier cash flow.
Practice good bookkeeping habits
Meticulous bookkeeping is one of the key cornerstones of business success and financial stability.
Accurate accounts, tax efficiency and a healthy cash flow all start with good bookkeeping practices. Establishing and upholding this will help your business in a whole host of ways, including:
- Staying on top of payments that are owed to you
- Making it easier to spot opportunities to cut costs or claim tax relief
- Forming accurate financial reports and forecasts
- Better budgeting
- Detection of errors, missing information or fraud
- Well-informed business decision-making
Hire an experienced accountant
The good news is that even though it’s your business, you don’t have to try and do everything yourself. A good accountant will help you understand your finances and keep your cash flow in check, as well as:
- Taking advantage of as much tax relief as possible to help reduce your tax bill
- Reducing expenses and wasted money to lower your outgoings
- Capitalising on the best funding opportunities (if this is a route you want to go down)
- Practising good bookkeeping habits
Often, it takes the perspective of a professional to steer you toward the most strategic and sustainable business decisions.
Find more tips and advice for your business on our website, or explore our guide on hiring the right accountant.
