How to effectively manage your cash flow

Poor cash flow management can seriously affect your business and your mental health.

Cash flow is the lifeblood of any business, and when times are tough managing cash flow effectively can make all the difference. If you don’t pay your bills on time, you may face late fees, penalties, and damaged relationships with your suppliers and customers, all of which can put your business at risk and have a detrimental impact on your mental health.

82% of Small to Medium Enterprises (SMEs) fail due to cash flow issues and Mental Health UK report that post Covid depression rates have increased from 37% to 50%.

These are alarming statistics, however with careful management and a few key changes, you can manage your cash flow more effectively and avoid the mental strain that comes with poor cash flow management.


11 tips for managing your cash flow

1. Be clear and agree your payment terms upfront.

Many small businesses fail to do this and are often taken advantage of. Do you have the Terms and Conditions on all paperwork?

2. Invoice products and services as soon as you can.

Ask for a deposit and invoice on the day of completion. The clock doesn’t start ticking on your payment terms until your customer receives, or evens accepts your invoice.

3. Understand your customer’s payment process.

For example, if you need to get a purchase order number, know who to go to, and obtain order numbers prior to starting work.

4. Protect yourself against bad debt.

Regularly credit check existing, and new potential clients. That new customer you may just have gained a large order from may be a slow payer, or in financial difficulty.

5. Chase debtors. Send timely statements and reminders.

Also, a phone call rather than an email to those who owe you money will be more effective. Using an online accounts system is also an excellent way to keep track of and manage your debtors.

6. Don’t offer your customers extended terms unless you fully understand the risks.

They may have their own cash flow issues. Put repeat offenders on the stop!

7. Understand your tax liabilities.

Approximately 30% of your revenue, takings, and bank balance is not yours. If you are VAT registered, make sure you keep a monthly record of what your quarterly VAT bill will be. Likewise, plan for any corporation tax or personal tax that is due. A good tip is to set up a second business bank account and continually top this up each month with any surpluses to pay VAT and tax bills. HMRC is normally the first to file for insolvency proceedings due to debts owed by businesses.

8. Pay your suppliers on time.

Ultimately you need to keep a good relationship with your suppliers to be able to continue trading. On occasions, you may also need to lean on them for extended payment terms.

9. Have a good relationship with your bank.

If your business is seasonal or you know you are going to have a couple of quiet months, then talk to your bank. They’re likely be more supportive, particularly if they can see you manage your business well by having the necessary controls in place.

10. Asset rich, cash poor?

Don’t tie up all your cash in assets, you could rent and lease equipment from cars, vans, forklifts, machinery to even printers, photocopiers, and office furniture. Whilst this may seem more expensive at least you won’t have your cash tied up. Outsourcing or using subcontractors may also be more cash efficient than having too many employees on your payroll, giving you flexibility at quieter times if workloads can be unpredictable.

11. Turnover is Vanity, Profit is Sanity, and Cash is Reality!

Don’t chase turnover, chase margin!


If you are struggling to get on top of your cash flow get in touch with Business Doctors for a free, no obligation health check.

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