Navigating cash flow challenges as a small business

Cash flow is at the heart of every successful business. Healthy cash flow is what allows a company to cover its monthly overheads and other liabilities as and when they fall due, using the money coming into the business to cover these costs.

Cash flow, however, is a two-way street and relies on a company’s creditors paying what they owe on time and in full which subsequently allows for the receiving company to pay their own bills. In many cases it only takes a couple of creditors paying late – or not paying at all – for cash flow to become squeezed.

When cash flow is compromised, the situation can quickly spiral and if not addressed swiftly. In the most serious cases, it can even lead to a company becoming insolvent.

Here are some ways you can help to navigate cash flow challenges as the owner of a small business:

• Improve your debt collection strategies – The longer a debt remains unpaid, the greater the risk of the debt turning bad. You should make it a priority that any late payers are chased up promptly and effectively. In practice this means sending regular reminders both before and after the payment is due. The good news is that much of this process can now be automated, with AI programmes able to schedule timely reminders which are sent directly to late payers, removing the need for you to do this manually. Don’t be afraid of asking for money which is owed to your business; being tenacious when chasing outstanding debts, however it is important to remain professional while doing this.

• Consider cash flow financing – Invoice finance is a type of asset-based lending which can be extremely useful for a company looking to add an element of certainty and stability to its cash flow position. This type of lending allows a company to access the money tied up in unpaid invoices both now and also on an ongoing basis. As soon as an invoice is generated, the invoice finance company immediately makes a percentage of the amount available; this means you do not have to wait for customers to pay before you can start utilising the money owed. Depending on the type of invoice financing that is taken out, you can also outsource the collection of unpaid invoices to the financing company, giving you one less thing to worry about.

• Vet your customers – As with most things in life, prevention is often better than the cure. Before extending a line of credit to customers, it can be beneficial to undertake your due diligence on them to better understand their credit worthiness. This process can help highlight potential creditors who represent more of a risk when it comes to late or non-payment. You can then use this information to inform your lending decision. For a potentially riskier customer, for example, you may wish consider asking for a deposit, or otherwise limit the amount of credit you extend to them.

Cash flow can make or break a business, therefore ensuring you have a firm grip of both the incomings and outgoings of your company is vitally important. Taking action at the earliest signs of impending problems can often be the difference between being able to put a workable action plan in place, and the company succumbing to the pressures it is facing. The sooner action is taken to remedy cash flow problems, the more options will be open to you and your company.