• Date

    31 Jan 2023
  • Category

Cash is King: Protecting and strengthening cashflow

With sky high levels of inflation, rising running costs and a deepening energy crisis, businesses of all sizes and from all sectors are feeling the pinch.

Figures from the Office for National Statistics show that 40% of the UK’s small businesses have less than three months’ worth of cash left to support operations. This is a situation being played out in businesses across Europe and around the globe.

Faced with such a perfect storm, what can SME business owners do to protect and strengthen cashflow?

Cashflow management and forecasting

It’s crucial to ensure there’s no misalignment between cashflow and profit. The business may be profitable but is there enough cash at the end of the month to pay wages and suppliers.

A 90-day cashflow forecast is an easy way to ensure the fund are in place. If there are doubts during this 90 day period, business owners should seek help to negate this early warning sign.

The more the cashflow cycle is understood, the more options available. Options can include securing extended credit terms for suppliers to ensure these are closely aligned to the customer payment terms or looking at financing options, including invoice finance, to get an early advance on sales..

There may be an option for an early settlement discount. Where there’s a large repeat customer, it could be that there’s an incentive to pay quickly, i.e., 7 days rather than 45 days or 60 days. This gets cash quickly back into the business.  Businesses that offer this type of discount tend to be large and wish to support the SME supply chain.

Essentially, stop, plan, and forecast forward. This allows entrepreneurs and businesses owners to know how much funding is required and then digest the options available to find the best route. A business may end up being self-funding or at the opposite extreme it could be in the form external equity. In between these two ends of the scale are mainstream funding, alternative funding or even supplier funding.

Payment terms

With SME owners focusing on growing their business, the job of chasing up overdue payments isn’t a priority. However, there’s a massive domino effect when outstanding payments roll on and growth can subsequently be curtailed. It may be the case that payment terms from customers is 60 days, while suppliers are paid in 30 days. This effectively means there is a lag between outgoings and incomings and hence a funding gap or working capital deficit.

Review business model

It is now more important than ever to plan for the future, and business models should be constantly and regularly reviewed. Some businesses may review every six months, others may be doing so daily right now.

A 50-page business plan may be required for a bank loan, but in reality, a document too lengthy won’t be beneficial to a business owner as it will likely sit in the drawer without being reviewed, adapted or held to account. A clear, concise business model highlights ambitions to work towards and acts as a to do list – making it easier to tick off and adapt if required. In a world where time is the scarcest resource, we need to make these more regular check-ins quicker and simpler.

As many businesses will attest to right now, fundamental changes to the business and operations serve as a trigger point to review current business model and how sustainable this is for the future. Regular checks of a business model also lessen the dangers of being purely reactive and changing business models haphazardly in firefighting mode.

Understand the impact of credit scores

Credit ratings influence the payment terms businesses can set for suppliers and customers. It’s important that due diligence is also done on potential customers to ensure they are definitely in a position to pay for the use of goods or services. If a customer fails to pay, then there will be a substantial cashflow knock-on impact.

Additional financial support

There is support available which sometimes goes under the radar, including accelerated capital allowances and R&D tax credits. Where applicable, these attractive tax incentives can help with a much-needed cash injection.

Typically, businesses also tend to stick to their main bank for funding or finance help rather than shopping about to see what’s available. Gone are the days when banks would give an unsecured overdraft or a medium-term loan to fund working capital. The good news is there is a wide range of finance providers available to SMEs. For example, there are the newer digital banking providers, independent finance companies, FinTechs, angel investors and private equity funds.

We are here to help

Current economic conditions are not ideal, but there are opportunities for SMEs. If businesses can seize the day, be dynamic and really understand their skills and model, they can come out of a recession in a better place.

Our team of experienced business advisors are on hand to help you navigate the economic uncertainty and talk you through any concerns around cashflow. If you have questions or would like to discuss the options available to you, please get in touch with your usual advisor or complete the contact form to speak to a member of our specialist team.

About the author

Donald Boyd Photo

Donald Boyd

Partner Glasgow Glasgow City
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