6. Top tips for effective cash flow management in owner-managed businesses

Effective cash flow management can make it easier for SMEs to attract debt finance

The latest Bank of England ‘Trends in Lending’ reports a decline in lending to UK businesses in the three months to May 2013; a contraction of around £4.5bn. Despite many lenders continuing to argue that demand for borrowing is somewhat muted, SMEs in the UK are telling us a very different story.

Lending to UK businesses has indeed declined over the past four years so it is not surprising that many SMEs have been finding it tough to access debt finance. There are a number of owner managers who have become resigned to the fact that borrowing from a high street lender is out of their reach; however with effective cash flow management, this need not be the case.

A critical review of the financial management of the business, coupled with the implementation of robust forecasting and monitoring, could allow many SMEs to position themselves much more favourably with lenders, and in some cases negate the need to borrow for working capital purposes. The numerous day to day challenges of running a business consume so much of an owner manager’s time that cash flow management is often overlooked, with serious negative repercussions for the business. Within any business it is imperative that there is an understanding of how cash is utilised; whom it is coming from, whom it is going to, and critically, when transactions will take place.

Four tips for maximising your cash flow

Managing cash within an SME may fall to the owner manager themselves, or to a dedicated finance function within the business; a financial controller or Finance Director for example, but the principles of effective cash flow management remain the same:

  1. Protect yourself by undertaking credit referencing; every business needs customers, but SMEs are experiencing late payment of invoices as well as bad debts on a regular basis. New customer credit checks are becoming increasingly popular with UK SMEs, and in addition to regularly undertaking critical reviews of your aged debtor list, your exposure to possible bad debt can be significantly reduced.
  2. Raise invoices promptly; it is best practice to raise an invoice as soon as possible after goods or services have been sold thereby reducing the risk of invoices being overlooked and therefore never being raised.
  3. Set clear credit terms and chase late payment; estimates show that over 80% of all business to business sales are made on credit terms, so ensuring that payment terms are adhered to and that invoices are paid on time are key elements of effective cash flow management. Consistent communication with customers is critical; clear credit terms and robust plans in place to address the late payments will ensure that the cash due to the business is actually realised.
  4. Forecast or ‘track’ the cash; Understanding the future cash requirements of the business to ensure sufficient funds are available to meet obligations as they become due will enable you to plan well in advance for any anticipated shortfall.

Despite the negative trend seen up to May 2013, the UK saw a record surge in lending to SMEs during June 2013. There does remain however, a long way to go before the overall lending figures show positive growth over a sustained period of time, but UK SMEs should use this surge as the catalyst to take the steps needed to proactively improve their cash flow management and thus bring debt finance within reach.

If you would like to discuss how your business could benefit from effective cash flow management or any of the topics covered above, please contact us through the Tectona website or call Mark Nicholls on 07818 407061 or Ronnie Epstein on 07543 275902.

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