​Did you know that fewer than half of small businesses in the UK are cash flow positive (more coming in than going out) in any given month?

It’s a surprising statistic. Although cash flow fluctuates throughout the year due to seasonal factors such as the festive period, annual leave and tax payments, it emphasises how as a small business owner, you can be walking a tightrope.

Having a keen grip on the situation will affect your ability to forecast and budget for growth, service existing customers, and even keep your business afloat.

Why is a cash flow forecast important to small businesses?

A healthy stream of cash flowing in and out of your business is key to success.

If you want to make the right financial decisions on a day-to-day basis it’s not enough to just know your bottom line – you need to be proactive.

This is where forecasting comes in, and it’s something we’ve talked about before.

In terms of cash flow, a forecast can help you with the following:

  • Planning – this could be managing expected gaps or growth, or contingency for unexpected situations. Whether it’s good news or bad, you’ll be better prepared.
  • Tracking payments – alerting you to clients that continually pay late, allowing you to review credit, terms and the way your business gets paid.
  • Budgeting – you’ll want to know if you’re on track to hit your targets for expenditure and revenue. If you’ve got a surplus of cash, how much can you reinvest in the business?

When you don’t keep track of cash flow proactively, it’s a welcome sign for increased stress levels, poor financial decisions and an increased chance of failure.

We’re not being doom-mongers here. According to statistics, up to 90% of business failures are due to cash flow, and with 60% of small business failing within their first 3 years, it’s fair to conclude liquidity is the cause in a lot of cases.

Here are some more stats that illustrate just how much cash flow impacts small businesses all over the UK:

What cash flow challenges do small businesses face?

You won’t be too surprised to learn that late payment has a huge impact on cash flow. The reasons aren’t straight forward but can often be linked to how small businesses collect payment from customers.

With up to 25% stating that overdue payment is a threat to their survival, even the Government has stepped in to address the issue.

We asked some small business owners for their thoughts on the cash flow challenges they face:

I no longer give terms, all invoices are due on presentation. I don’t really have budgets or forecasting, but I do know how much I need to turn over each month as a minimum to survive and I keep an eye on that throughout the month.

Amanda Gilbert-Roulstone

I think what you may lose in sales from companies that will only deal with you if you give extended terms will be offset by the savings on staff to carry out credit control, bank charges etc

Pip Bell

I’ve got better at cash flow but I struggle with budgeting and forecasting. I’d really value some insight into managing both.

Kirsty France

It’s also unsurprising that many small business owners take a short-term view on cash flow, essentially playing it by ear.

When you’re occupied with daily tasks and management, it can be difficult to take a step back to look at the bigger picture.

What can you do, besides spending precious time working things out in a spreadsheet?

You could hire an external advisor to help you get to grips with your cash flow, budgeting and forecasting, or take advantage of changes in the way payments are being made.

Choosing an automated means of taking payment could be the key to achieving the holy grail of cash flow health.

Late payment and its consequences

There are software applications to help with almost every area of your business. They can automate processes and boost staff productivity, generate reports and help to manage customer relationships.

Despite this, many small businesses still rely on their customers to remember to pay invoices. This can often lead to longer payment timescales and a higher risk of bad debt.

That’s not to mention the energy-sapping time you’ll spend chasing unpaid invoices, the effect on relationships and the uncertainty and risk of poor cash flow.

A lack of cash flow due to late payment means:

  • Paying your suppliers and staff before you’ve received payment from your customers.
  • Less cash is available to cover future expenses.
  • Inability to grow your business and reinvest in people, resources or stock.

Late payment and poor cash flow will hamper your ability to budget and forecast for your business. You’ll be firefighting instead of planning ahead.

It also means you’ll struggle to service new customers effectively and have a much weaker case when it comes to accessing funding and financial support you might need for your business to grow.

Take back control of your cash flow

As we’ve already mentioned, being able to forecast holes in your cash flow is key to business planning and survival.

Traditional payment methods such as debit/credit cards, bank transfers and even cheques (yes, some people still use them!) rely on the customer. Consequently, the average payment time on a 30-day invoice is 40 days.

The good news is that there are a few important actions that could help you take back control of your cash flow:

With predictable payments coming in, and more reliable data, your cash flow forecast will get a lot easier.

Automation and quicker payment processing makes your life less stressful, and management of cash flow much easier.

By combining forecasting apps with cloud-based software like Xero, you’ll get a much quicker overview of your business finances. Budgeting becomes easier, as does making those all-important financial decisions.

Freedom in Numbers - a Fresh Approach to Your Financials

Freedom in Numbers isn’t just about accounts and bookkeeping. We’ll support you with the information you need, when you need it – giving you the confidence to make the right financial decisions for your business.

We’re always interested to hear from other business owners about their experiences. If you’re facing issues when it comes to cash flow and forecasting please let us know in the comments, or via email.