Seven steps to cashflow management | NatWest


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Add your signposting title here… Managing your money

Cashflow management is a thorny problem for many small and growing businesses. Arguably, positive cashflow is the single most important element to keeping a business afloat.

The latest statistics from the Department for Business Innovation and Skills (BIS) show there were 246,000 business failures in 2014, of which 99% were smaller companies. Cashflow can be the difference between survival and failure, our seven steps can help you manage your cashflow.


Better cashflow management

1 - Manage late payments

Late payments are a tough problem for small firms to deal with - small companies were owed £586bn as of October 2016, according to Lloyds Bank. Yet many companies won’t chase bad debts because they fear it will have a negative impact on customer relationships. A recent YouGov poll found the majority of small businesses don’t chase unpaid invoices until at least two weeks after they’re due, with 4% waiting more than two months.

There are practical steps you can take to stay in control:

  • Ensure your payment terms are clear - ambiguous payment terms are likely to lead to delays
  • Emphasise, politely but firmly, legal requirements to meet terms. According to the Federation of Small Businesses (FSB) only 20% of members believe that the voluntary Prompt Payment Code, (30-day standard, with a 60-day maximum limit) is sufficient.

Large companies are now required to publish payment practices biannually, disclosing the average time they take to pay. These new reporting requirements may yet make a difference. As could the appointment of a Small Business Commissioner to investigate late payment claims and offer mediation services when neither side wants to go to court. The key is to emphasise the buyers’ responsibilities and chase payments.

If your business needs funding and you want to look at the options available, you can read our article.

Funding your business

2 - Check for creditworthiness

It is also important to check customers are creditworthy. If you accept large orders from individual clients, take steps to reassure yourself that they will pay. And refuse so-called “back-to-back” payments. This is where you get paid when the customer gets paid. It can cause your business problems further down the line.

It is also worth considering placing incentives on swift payments. You could find that even a small discount of 1% or 0.5% on large orders might encourage prompt payment. If cashflow is an issue for you, this could be an effective strategy.

3 - Be organised

For a small or growing company, managing cashflow can be  something that gets overlooked. The focus in any business is always going to be on finding and retaining customers, providing good service, and developing new products.

Yet, companies are more likely to go out of business simply because they run out of cash, than for other reasons. “The number one reason people fail is that they run out of money,” says David Goldin, founder, president and CEO of Capify.

Cashflow forecasts can be an invaluable asset to stop you getting into trouble. Done properly they will alert you to do something if trouble is on the horizon. “Planning gives you the opportunity to ask your business the right questions to avoid unnecessary costs, and to charge the right price,” says Michael Ogilvie, client services director at chartered accountancy practice OBC.

4 - Be professional

If you deliver in a timely way and appear professional and organised, you’re more likely to be paid in full and on time. Don’t give your customers an excuse not to pay, give your business a head start by sending invoices promptly. Late invoicing suggests to the supplier that you won’t mind late payment.

Once your business is a little more established in the market it might be possible for you to start to have more leverage and to start negotiating. “This is when you should speak to suppliers and renegotiate terms,” says Michael Ogilvie, client services director at chartered accountancy practice OBC.

5 - Efficiency is key

It's important to manage stock and inventory effectively. Don’t overstock because it eats up cash, but equally try not to run out of stock either. If you have large capital payments to make, or if your day-to-day costs are expensive especially when you’re starting the business, try to finance the company without putting pressure on cashflow.

Ask whether you can you lease equipment rather than buy it. Especially at the start, capital costs can sink a company. It may cost more in the long term to lease, but protecting your cashflow early on makes this a good investment. 

6 - Free up cash reserves

As well as standard loans, there are other options that might suit your business. Asset finance spreads the cost of capital investments, while invoice finance helps release cash from unpaid invoices. If your business is suffering from lots of late payments, invoice finance could speed the process of getting cash to your account. Trade finance can be used when you need to make capital purchases, but the seller won’t offer terms.

However you finance your business, it is important to have back-up plans in place. Small businesses rely on cash liquidity, and an unexpected payment can quickly drain your business of resources. Once you’ve built up a cash reserve, keep a proportion of it in an emergency fund.

7 - Have a contingency plan

Don’t invest everything you have in the business, and consider spreading payments. It's a good idea to know where you can turn quickly for fast cash, should you need it. Ensure you have an overdraft in place for emergencies - you don’t have to use it, but having one will afford you peace of mind.

Do all you can to avoid getting caught out by wider issues that you can’t control. The introduction of the National Living Wage, for example, impacted many small businesses’ cashflows in 2016. You must also make sure you understand the potential impact of new immigration laws.


Finally, if you are in need of help, don’t be afraid to ask for it. Small business owners who seek advice are more likely to succeed. There are always solutions to cashflow problems, don’t feel it’s a weight you have to bear alone.

You can use the FreeAgent cashflow forecast template to help with your planning.

Cashflow template

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