How to manage cash flow in your business

Please be aware that this is a guide only and you should seek specific advice for your business*

Cash flow management is a common problem for many small businesses, and research shows that the challenge has become even more severe during the Covid-19 crisis. According to the Organisation for Economic Co-operation and Development, 69% of UK SMEs experienced serious cash flow problems due to the pandemic.

Even in normal trading conditions, cash flow problems can arise for a wide range of reasons. This includes declining sales, higher costs, and late payments from clients and customers. Without effective cash flow management your business may struggle to pay for expenses like staff, suppliers and debts, and you may even have to cease operations.

This guide sets out some steps you can take to manage your cash flow and get your business on a stronger financial footing.

Why is it important to manage cash flow

It's important to manage cash flow as having positive cash flow is vital to the financial health of your business, as it will affect your ability to cover your costs and invest in your business plan.

Positive cash flow occurs when the amount of money coming in is greater than the amount going out, while negative cash flow occurs when the amount of money leaving your business is more than the amount coming in.

What is a cash flow statement?

A cash flow statement is an important way of keeping a regular check on the financial health of your business, separate from your income statement and balance sheet. The cash flow statement allows you to itemise the amount of money moving in and out of your business in a given period of time, enabling you to keep track of your working capital.

You can find an example template of a cash flow statement online, or you can consult our partner organisation the Federation of Small Businesses for more guidance. As with other bookkeeping tasks, you can use accounting software or spreadsheets to create your own cash flow statements, or otherwise hire an accountant to do this for you. The main components of the cash flow statement are:

Core operations

The operating activities listed on the cash flow statement include any income or expenditure from your regular business activities. This could include sales receipts, payments made to suppliers, salaries paid to employees, and other operating expenses.

Remember to note the difference between cash received and cash owed. For example, recording sales of £5,000 is different to operating cash flow, where if that sale is paid 50% upfront and 50% in three months, there is only £2,500 coming into the business to support all of the outgoings over that period.

Investing activities

Investing activities on the cash flow statement include sources and uses of cash from a company's investments. This could include the purchase of new equipment, or money made by the sale of an asset that the business previously invested in, such as property.

Financing activities

This relates to finance-driven changes to a company's cash flow. These may include changes to the credit lines a business holds through bank financing, or dividends paid out to shareholders.

Ways to improve your cash flow

Using your cash flow statement as a guide, you can identify those parts of your business where something isn't right. By focusing on these issues and making the right changes, you can start to improve your cash flow.

Get paid faster

There are some simple steps you can take to speed up payments owed to your business. This includes sending out clear and accurate invoices in good time, keeping a track of late payments, and opening up a productive dialogue with clients if there is a genuine problem with payment. You could also offer incentives such as discounts for early payment, or conduct credit checks on potential customers before agreeing credit terms.

More information and advice on how to chase unpaid invoices can be found here.

Improve inventory management

If your business sells or manufactures goods, a significant amount of cash will be tied up in inventory, so conducting a thorough inventory check is one way to see where you could free up some working capital. Identify which products aren't selling as well as others, and adjust your orders to avoid being left with unwanted stock. You could also conduct a review of your business assets and free up cash by selling equipment or property that is no longer needed or adding value. You could even look into buying used machines or equipment as opposed to brand new.

Boost your revenues

This is one of the most obvious ways to improve cash flow, but it shouldn't be neglected when you sit down to review your business finances. There are many possible levers available for growing revenues, such as raising your prices (particularly if you’ve been underselling yourself compared to competitors), expanding your customer base and upselling to existing customers.

A new marketing strategy could also encourage customers to buy from you more frequently, or help to introduce your business to new markets.

Reduce overheads

Keeping track of your costs is essential for cash flow management. Your cash flow statement will help you to identify any unnecessary expenses, as well as opportunities for streamlining your processes. This could include using software to automate certain back office jobs that were previously done manually, helping you to save both time and money.

Re-examine your relationships with suppliers too to see if you could get a better deal elsewhere, or if you could make savings by buying in bulk or leasing equipment.

Deal with your debt

Keep an eye on your bank financing and how this affects your company's cash flow. For example, if you find yourself reliant on lines of credit to get to the end of each month or business quarter, it's a clear sign that you need to free up cash within the business. Refinancing your debt could be an option, but remember that you will still need to pay it back at some point. The Federation of Small Businesses has outlined a number of financial products that you may want to consider as options.

Building up a cash buffer is one of the best ways to take control of your business finances. If you're making good profits, then setting aside some cash for a rainy day will give you more room for manoeuvre during challenging times. You could even invest some cash in a business savings account to earn interest and boost your cash flow for the long-term.

Further resources to support you and your business

As you can see, there are several steps you can take to improve your cash flow. We've also put together a guide to help with your overall business finances, from what to think about when opening a business bank account, to keeping on top of your bookkeeping.

At The Co-operative Bank we care about you and your business, which is why we've created a number of these useful guides to help you.

If you'd like to learn about creating a business continuity plan, our guide can provide support.

If understanding asset management is something you'd like to learn more about, then we've created a guide for you here.

For more helpful support and resources, our Business Exchange hosts a wide range of content tailored to you and your business.

*While all reasonable care has been taken to ensure that the information provided is correct, no liability is accepted by The Co-operative Bank for any loss or damage caused to any person relying on any statement or omission. This is for information only and should not be relied upon as offering advice for any set of circumstances. This is merely a guide and each business is unique in its requirements. Specific advice should always be sought in each instance.