The Business Owner’s Guide to Cash Flow Success

Executive Summary

Cash flow. The beating heart of any business, it’s also the single biggest killer of UK SMEs, with over 80% citing poor cash flow as their primary reason for failure.

An ongoing balancing act between cash inflow and outflow, successful cash flow management not only increases survival rates, but improves productivity, reduces debt, and increases liquidity to fund future growth.

Here we provide the ultimate guide to cash flow success for business owners. Everything you need to get a firm grip on your cash flow and set your business up for maximum success.

We offer advice on how to spot the causes of cash flow problems and what warning signs to look out for so you can be one step ahead.

We also show you how to get money coming into your business faster through smarter invoicing and debt collection, how to optimise your supply chain, deal effectively with late payments, prioritise your own debts, and how to keep effective budgets and forecasts to maximise growth and inform your future investment strategies.

It’s time to take back control of the money in your business, make the most of the opportunities it provides and set yourself up for future success.

Rob Keown-BoydCEO & Founder

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Contents Executive Summary

Recognising Cash Flow Problems

Cash Flow Defined

8 Steps to Cash Flow Success

Good Cash Flow Management

Conclusion

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Cash Flow DefinedCash flow defined What is cash?

Cash flow is called many things: “The lifeblood of all businesses”, or “the primary indicator of business health”. And how many times have you heard the saying “Cash is king”? They all mean the same thing: cash flow is the most important thing to the success of your business.

Essentially, cash flow is the movement of money in and out of your business. It is the measure of your ability to bring in enough money to pay your overheads such as rent, insurance, and salaries, and business expenses such as supplier invoices. It also remains one of the top accounting problems reported by business owners.

Cash does not mean profit. Cash is the money actually received and spent in the process of doing business. Profit is the money made after all expenses are deducted from revenue.

Although it is important to focus on building a profitable business, it is crucial that you know how much money you have in the bank. Your sales may be great, but your business can be exposed and your bank account empty, even if only a few customers decide to pay their invoices later than usual. This is why cash flow management is so imperative to a sustainable business model.

Cash flow looks at the timing of money changing hands, and whether it’s aligned in a way that means you can pay your expenses when you need to. Business failure rears its ugly head when demands for cash, from your employees, suppliers, landlord, or tax man, arrive before the cash you’re owed is collected. This is where cash flow management comes in. In short, many business fail due to lack of cash, not lack of profits.

51% of UK small business owners

cite cash flow as their ‘biggest

challenge’. - Experian

If your incomings are greater than your outgoings and you have both a cash buffer for contingency, as well as a clear and well-researched forecast with realistic expectations for the coming year, then your business is in a healthy cash flow position.

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Good Cash Flow Management

What is Cash Flow Management?

Why Cash Flow has to be Managed?

The Advantages of Good Cash Flow Management

Data Helps Your Cash Flow Position

What is Cash Flow Management?

Cash flow management is a balancing act between inflows and outflows. In academic terms, the theory behind cash flow management is to:

Speed up your cash inflows - the flow of money into your business

Manage the timing of your cash outflows - The money going out of your business

Minimize expenses - The operational costs of running your business

With effectively managed cash flow, you can forecast your available cash at any given point, and plan your business activities in a way that ensures adequate cash for all your expenses, even the ones that when accumulated, and not planned for, can make or break your company.

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Inflow

Cash from salesCash from outstanding customer accounts (accounts receivable)Bank loans / alternative financeInterest on investmentsShareholder investments

Buying goods for selling onBuying materials for manufacture

Buying servicesStaff costs

Operating costs e.g. rent, marketing, product development

Buying fixed assetsFinance arrangements e.g. interest on loans

VAT and taxes

Outflow

Your cash inflows come from the sales of goods and services to your customers. If you are extending credit to your customers, then the cash inflow only occurs when you collect on your accounts.

This yet-to-be-collected cash is known as ‘accounts receivable’. The cash you collect is usually used to purchase more resources, which then creates value through the production/acquisition of more goods to sell to customers. Payments are again then collected, and the money is used to invest in new resources and expenses. These inflows and outflows make up the cycle of cash flow.

To put it simply, cash coming into your business is not inevitable, no matter how good your product or service may be. For you to create and maintain a healthy flow of cash into your business, it needs to be: tracked, monitored, chased, captured, converted, protected, and controlled.

Cash flow is not a given, and as such must be managed skilfully throughout the entire cycle. In lean or uncertain economic times, businesses can feel the pinch on their cash from both sides - from their customers’ inability to pay invoices due to financial difficulties, as well as the general scarcity of cash from outside, non-operational sources such as bank loans and finance.

Why Cash Flow Has to be Managed?

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The Advantages of Good Cash Flow Management

Effective cash flow management is not only for keeping the business afloat in difficult times. It is also important in more positive economic conditions. If businesses don’t keep a close eye on working capital, this can cause serious problems for businesses, including stifled competitiveness, and overtrading beyond means.

There are many advantages of good cash flow management, aside from keeping your business afloat and your staff paid. Other benefits of good cash flow management include:

• Increased awareness - you can spot potential gaps in cash flow and take action to reduce their impact, or plan ahead to make investments knowing that other commitments are met

• Increased productivity - With less time devoted to managing finances, more time can be devoted to business development and other key activities

• Increased liquidity - helping you to keep agile enough to cope with the fluctuations of running a day-to-day business

• Reduced debt - with more cash available, you’ll be able to reduce those cash-sapping monthly commitments that have high interest rates or late payment fees that can drain your working capital

Data Helps Your Cash Flow PositionHaving accurate, comprehensive data is crucial to understanding your cash flow position. Keeping record of all of the following factors will help ensure that you have a good handle on your inflows, outflows, balances, risks and expenses. According to CIMA, important data points to have understanding of are:

Customers’ credit statusCustomers’ payment recordsOutstanding receiptsSuppliers’ termsShort term expenses / cash demandsShort term surplusesInvestment optionsCurrent capacity for debtLong term projections and forecasts

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Recognising Cash Flow Problems

Causes of Cash Flow Problems

Recognising a Cash Flow Problem

Negative Cash Flow vs Negative Cash Balance

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Causes of Cash Flow Problems

The essential cash flow problem is of course negative flow, i.e. there is more money going out of your business than coming in. However, this can be caused by a number of factors.

The primary causes of cash flow problems for business include:

• Poor levels of profit (or losses)

• Over investment in fixed assets

• Too much or unbalanced stock inventory, tying up cash

• Being too generous with customer credit

• Overtrading beyond capacity

• Unexpected changes, both internal (staff, machinery) and external (recession, new legislation)

• Fluctuations in seasonal demand

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Recognising a Cash FlowProblem

Negative Cash Flow vs Negative Cash Balance

“One in four SMEs said that if the amount it was owed grew to £50,000, it would be enough to send it into bankruptcy.” - BACS Payment Schemes study.

There are a few clear warning signs that signify a problem with poor or negative cash flow:

• Showing decreased liquidity and running out of working capital

• You are overtrading: selling more or faster than you can cope with financially

• Excessive short-term debt

• Missing out on payables discounts or paying them beyond terms

• Late or slow collection of outstanding receivables, causing them to pile up

• Paying creditors beyond terms

You can also use an accounts receivable to sales ratio to see if signs of a cash flow shortage are beginning to appear.

For example, an increase in your accounts receivable to sales ratio from one month to the next indicates that your investment in accounts receivable is growing more rapidly than sales. This is often one of the first signs of a cash flow problem. If you’re running a highly seasonal business, it’s important to compare like for like, otherwise the comparison may provide misleading information.

Negative cash flow occurs when more goes out than comes in. A negative cash flow is the decline in your cash balance over a period of time. Negative cash balance is something different and is not a good sign at all. A negative cash balance occurs when you’re unable to pay your bills. A negative cash flow when not managed properly can cause your business to fail over time, but a negative cash balance signifies the imminent end of your business.

If you are experiencing negative cash flow, it is imperative that you address it before you reach the point of negative cash balance.

Accounts Receivable / Sales for the Month

Accounts receivable to sales ratio

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8 Steps to Cash Flow Success

Get The Money Coming in12

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Keep Solid Budgets and Forecasts

Prioritise Your Own Debts

Deal With Late Payments

Optimise Your Supply Chain

Trim Costs, Create Value

Put Your Cash Surplus to Work

Explore Alternative Finance Options

Get The Money Coming inStep 1

Streamlining the cash flow into your business means developing and maintaining a smooth and efficient cash conversion period where you can collect cash quicker, enabling you to meet your cash outflow obligations.

The elements of the cash conversion period you need to hone are as follows: Customer buying decision and ordering process

* Make sure that it’s easy to understand what it is you’re selling and perfect your marketing and sales operations.* Make it as easy as possible for the customer to purchase. Use the internet for ecommerce and accept payments in as many forms as possible.* Consider the customers’ needs: international currencies and languages, help them make that decision to buy and place that order.

Credit decisioning

* A smart credit policy is crucial to ensuring your cash flow doesn’t fall victim to a policy that is too strict or too generous.* If you’re not in a position to have your customers pay upfront, then be sure to credit check them. Start this process as early as possible to speed up the time taken to secure a purchase. * Make sure you check and agree to credit terms and conditions in advance of allowing purchases. Extending credit to secure a sale may look good on the P&L sheet, but that customer must be creditworthy. * Consider offering early payment discounts to your customers.

Order fulfilment, supply and shipping

* Make sure your production processes, resources, shipping arrangements and inventory/service levels are capable of meeting the terms and conditions for order fulfilment that apply to you. * Don’t let delays in your business processes cause a delay in getting paid, whether that be for products or services.* Check stock to sale ratios to gauge your inventory process efficiency, or if you supply services, make sure you have the bandwidth to deliver on time.

Correct Invoicing

Without an invoice, you won’t receive payment. Make your invoice clear, and send it within 24 hours. You want to get into your customer’s payment processes as soon as possible. Include the following on your invoice:

• Customer details

• Description of goods or services sold

• Delivery date

• Payment terms

• Due date

• Invoice date

• Price and total payable

• Whom they should be paying

• Order number and authorisation code

• Your own details - contact, registration and VAT

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Collection - handling debts

*Be organised. As soon as the sale is made, you should begin your collection process.*Weigh up the benefit to your cash flow against the cost of losing customers when establishing your collection period terms. 30 days is standard.*Learn and understand each of your customers’ payment cycles, and be sure that your invoices are approved and included in the payment run for the month. Call ahead to ensure they have all the information they need.*In credit management there’s a saying that ‘he who shouts loudest gets paid first’. Be polite but firm from the outset on your payment and credit terms.*Consider using a credit management system to reduce the amount of time managing debtors and encouraging faster payments.

Payment of funds

Avoid postal payments, including cheques. This can add several days to your cash conversion period. Encourage electronic means wherever possible.

Budgeting

Both budgeting and forecasting are extremely important to maintaining healthy cash flow. Despite forecasting being seen by many businesses as a more regularly updated medium, a budget still provides a strong foundation upon which to work from. If something goes awry, it can act as an anchor - things may change along the way, but a budget helps you to keep sight of what was decided in the first place.

While incorporating all elements of the business where possible, try to keep your budget as simple as you can, and be prepared to create two versions: one for when things go well, and one for if things go badly. Don’t overestimate your income for the sake of being optimistic.

If you struggle to create an annual budget, consider splitting it into smaller periods, perhaps quarterly. This type of budget will invariably be more accurate and will reflect the ongoing reality of your situation. However, if your business is seasonal, you may find that the detail afforded in an annual projection will help you better understand the challenges that lie ahead.

“If you are making 1.5% profit on sales, an uncollected debt of £1,500 nullifies £100,000 worth of sales” - CIMA

Keep Solid Budgets and Forecasts

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Step 2

Prioritise Your Own Debts

Forecasting

Whether it’s the ability to negotiate financing, or simply making your plans more achievable, it’s important that you remain committed as a business to keeping an effective and accurate forecast. In basic terms, you should include the following in your forecast:

Cash receiptsCash paymentsExcess or shortfall of receipts over paymentsOpening bank balanceClosing bank balance

Be sure to have all the information to hand, and keep things simple. Group costs and revenues together for ease of calculation. Don’t forget your VAT obligations and make a note of key payment dates.

When budgeting and forecasting, don’t become a victim of ‘overtrading’ - where you’re selling so much that you run out of cash to buy the resources you need. The better your forecasting/budgeting, the more time you will have to explore options and take the appropriate steps.

Tempering your growth trajectory or borrowing money to bridge a working capital gap is often an important part of a successful financial strategy.

Your employees and your suppliers should come first. You, as the boss, or shareholder should come last. Always make sure you keep your suppliers happy. If you’re a good customer to your own suppliers you may find the additional benefits they give you to be a lifesaver in tough times.

Remember, better financial performance ultimately comes from having and maintaining competitive advantage in the marketplace, not from better financial management in and of itself.

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Step 3

Late payments are considered to be the scourge of the small business, with over 1 million SMEs experiencing slow or late payments. Late payments can quickly turn into bad debt, which can have disastrous consequences for SMEs. There are however, a few pre-emptive steps that can be taken to minimise late payments, (some of which have already been listed previously):

• Perform initial credit checks

• Make your payment and credit terms very clear to prevent excuses

• Establish and maintain good payment habits by being on the ball from the beginning

• Send out your invoice promptly and make it 100% accurate

• Keep a close monitor on payment due dates

• Chase invoices as soon as they become overdue

• Have a formalised escalation and collection process that is made clear from the outset

• In some cases it is feasible to get 50% of even 100% of payment upfront

To help you to deal with late payers, use data to help you recognise trends and highlight which of your customers are regularly late or defaulting on their payments and by what amount. This will help you prioritise your debt collection processes and also the decision to cease doing business at all with some companies. Consider moving consistent late payers onto a ‘cash only’ basis, if that seems right.

Deal With Late Payments

“Collecting debts is a competitive sport - If you’re not getting paid then someone else might be” - CIMA

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Step 4

“Most businesses can survive several periods of making a loss, but they can only run out of cash once” - CIMA

Look beyond your own customers and look instead to your own suppliers to ease cash flow issues. Don’t be shy about asking existing suppliers for a discount to stay with them for another year. This will help your cash outflow situation. Order regularly and pay on time, then you’re a good customer to your suppliers which can bring extended terms and early payment discounts. This can positively help your cash flow situation. Conversely, if you are a seasonal business, arranging a payment plan with your suppliers that adjusts to your changing needs can be beneficial and create clarity with everyone. If you can pay within 15 days during the summer months, but need 60 days credit out of season, discussing and arranging this with your suppliers can help the whole supply chain.

Are there any areas of the business that are not creating value? Always be aware of unnecessary costs, as money tied up in your business through fixed assets means money that isn’t available when you need it. Order regularly and pay on time. This makes you a good customer to your suppliers, which can bring extended terms and early payment discounts. Both of which help your cash flow situation.

Optimise Your Supply Chain

Trim Costs, Create Value

Remember, healthy cash flow management is all about speeding up money in, and slowing down money out. Without being a late payer yourself, you want to be able to align your inflows and outflows to maximise your own cash position.

Having the ability to bridge gaps in cash flow to maintain a strong and stable supplier relationship is key. This is where having the correct financing options in place can come into its own.

Significant supplier discounts can be achieved through bulk purchase, however, serious problems can occur when large amounts of cash are tied up in surplus or unnecessarily large amounts of stock. Explore efficient stock management operations. Base decisions around improving efficiency. Strike a balance between securing bulk discounts from suppliers, and keeping your orders smaller which will avoid working capital gaps.

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Step 5

Step 6

If you’re in the fortunate position of having a cash surplus, then it’s a good idea to make hay while the sun shines. It also reflects well on your business planning skills if you can extract maximum value from your cash balance. Here are a few options open to you:

• Build up a strong profile with your creditors/suppliers by paying them early

• Improve your balance sheet and reduce interest payments by paying down your debt

• Use the cash wisely to invest in product development, expansion, and to fund your growth strategy

Whichever option you choose, it’s important to consider how it will affect the future agility of your business, and provide the most flexible yet stable basis for growth.

Put Your Cash Surplus to Work

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Step 7

‘Business owners regularly review their surplus funds, six out of 10 (62%) do so at least once a year which indicates that businesses are thinking about how their cash could be working harder for them.’ - Aldemore

Having a sound financial system in place to ensure you can seize upon opportunities for growth, and close any gaps in your working capital is crucial to cash flow success.

Having the right financing in place will enable you to operate from a position of stability and strength.

From traditional sources of income such as overdraft facilities and bank loans, to flexible short term finance and growth-enabling revolving credit facilities, the increase in finance options now available means that it’s easier than ever for SMEs to structure their cash flow management cycles effectively. With simplicity and flexibility at their core, alternative finance providers have been endorsed by the UK Government as engines for growth and financial stability.

Choosing the right alternative finance provider has many benefits:

Speed - cutting edge technology and automated credit scoring means applications are processed quickly, providing working capital exactly when it’s needed.

Simplicity - Less paperwork, efficient processes and intelligent online platforms mean more time for you to concentrate on your own business.

Flexibility - Providers, like Pay4, that provide payment for any invoice that you owe, who don’t charge non-usage/early repayment fees, allow SMEs to use the funding with maximum flexibility.

Transparency and awareness - Transparency around fees, terms and eligibility, means better control of day-to-day running costs, and improved planning and forecasting.

Improved fulfilment and capacity - Having the cash flow available to meet increases in demand means the chances of falling foul to overtrading are significantly reduced.

Explore Alternative Finance Options

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Step 8

As outlined above, the importance of effective cash flow management cannot be overstated. It not only marks the difference between success and failure, but also provides numerous benefits for business that become even more pertinent in times of economic downturn.

Successful cash flow management starts at the very beginning of the journey that cash takes into your business, and cycles through every part of your operations, informing forecasts, budgets, and future strategies. If managed correctly, then it truly is the lifeblood of a successful, profitable business, and allows for continued investment and growth.

Ensuring your procedures and processes are aligned in such a way that cash enters and leaves your business at optimum speed is key to keeping a healthy cash balance.

Orders must be fulfilled efficiently, invoicing must be accurate and clear, credit extended judiciously, debt collection tightened, supply chains optimised, value creation maximised, and the right finance options considered.

Having taken on board the points above, your business should now be armed with the necessary information to help you build a healthy cash balance that will stabilise your finances and improve your chances of long term success.

Conclusion

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Pay4 is a flexible business finance solution, providing UK SMEs with working capital to settle supplier invoices. Founded in 2013, Pay4 believes that every stable and growing business should have access to business finance without constraints or delay. Success is knowing we have supported our customers through tough times and through times of growth too.

Pay4 provides a revolving, unsecured credit facility. Credit limits, which start at £50,000, can be used, repaid and reused as often as your cash flow cycle requires. Pay4 does not require security in the form of personal guarantees or business assets. This makes it straightforward to get our customers up and running quickly.

Because Pay4 is an unsecured credit facility, we work solely with UK companies with a track record of growth and stability. We are not an appropriate business finance solution for all businesses but we may well be a perfect fit for you if your company meets the following criteria: Limited Company or PLC incorporated in the UKTrading for 3+ yearsProfitable with a capital base of £200kTurnover of £1.5m+ per annumAny industry sector with UK and/or international suppliers

0845 0180 760pay4.co.uk

Pay4 (UK) LimitedNorth WarehouseGloucesterGL1 2FBUNITED KINGDOMinfo@pay4.co.uk

Pay4 (UK) Limited is a private limited company incorporated under the laws of England & Wales. Registered office: Burton Court, Linton, Herefordshire, HR9 7RR. Company Registration Number: 08578456. Incorporated on 20 June 2013

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