Turnover matters. But it can also be misleading! A healthy turnover doesn’t mean that your business is the picture of financial health. Most owners of SMEs know that to understand the state of their business finances, cash flow is much more important than turnover. This is why cash flow management needs to be at the heart of your operations.
Any Business can be crippled by poor cash flow management. Even multinationals with multi-billion dollar turnovers can be brought to their knees when they don’t have the liquidity to meet their obligations to their creditors. Here we’ll consider why cash flow management is so important for businesses, and how to ensure your company has enough liquidity to stay solvent.
What is cash flow management?
Cash flow management is essentially how you manage your operations in a way that’s conducive to healthy cash flow. It’s inherent in everything from your invoicing process to your relationships with suppliers and vendors. It’s in the profit margin you apply to the products and services you provide, and the accounting software you use. There’s no single way to “do” cash flow management, but it must be woven into the fabric of your daily operations.
Why is cash flow management important?
Cash flow management requires constant diligence, regular reporting and a tight grip on the purse strings. Without it, you can send your business down a slippery slope towards insolvency, debt, diminished profit margins and even liquidation. While cash flow management requires effort and attention to detail, it’s vital to your business for several reasons:
1. Better understand your spending
A profit and loss statement may be an effective snapshot of your business finances. But it doesn’t always paint a clear picture of where your money is going. Paying attention to your cash flow management helps you to better understand your spending, and where you’re seeing healthy ROI.
2. Maintain good relationships with vendors
Late payments can not only lead to surcharges and interest, they can also sour your business relationships. Effective cash flow management can protect these and ensure that you remain on good terms with your vendors, which is crucial in maintaining a good business reputation. And the better you take care of your vendors, the more likely they are to take care of you.
3. Improve financial planning
Regular cash flow reporting provides a granular perspective on where your money is going and facilitates better informed financial planning. It can allow you to make capital investments without worrying about how you will pay your bills. It can prevent you from overspending when expenses are likely to be higher than usual. It can help you to be proactive rather than reactive with your business finances.
4. Chart a path to sustainable growth
Most SMEs have growth in mind, but growth requires significant capital investment in plant, premises and personnel. Effective cash flow management can prevent your growth from being hobbled by the scale of your upfront investment, allowing you to grow your business sustainably.
Tips for effective cash flow management
Cash flow management is a fluid concept. There’s no single way to do it, and you’re free to find your own approach that’s attuned to the needs of your business. However, if you’re unsure where to start, here are some practical tips:
Incentivise customers to settle invoices quickly – sometimes liquidity is worth the dip in margin created by a small discount
Leverage escrow services to protect cash during high-value transactions
Eliminate wasteful spending – even something as simple as switching your business energy supplier can reduce operating costs and ease cash flow
Explore finance or hire purchase options to prevent large capital investments from putting a squeeze on your cash flow
Carry out regular reporting and forecasting to get a clear understanding of your finances in the present and future
We can help
If you’re interested in discovering more about cash flow management, or any aspect of managing your business finances, then get in touch with the financial experts at GoCardless. Find out how GoCardless can help you with ad hoc payments or recurring payments, improve cash flow, and reduce the cost of getting paid.