Cash flow management tips for businesses

Cash flow is the lifeblood of any business. Managing it effectively ensures that you generate enough money to cover all your costs and keep your business running smoothly.  

Business owners often face challenges when it comes to managing their cash flow. These include seasonal fluctuations, in demand for products and services and late payments from customers.  

Preventing and overcoming these challenges is vital, because if you lack the money to pay your employees or other expenses, your business will struggle to stay afloat.  

In this article, read practical tips to help you optimise your cash flow management and put your business on the road to long-term success.   

Understanding cash flow basics 

It’s crucial that you understand the fundamentals of cash flow to ensure that you manage it effectively.  

Cash flow is defined as the movement of money in and out of a business during a specific period of time.  

The key components are as follows: 

Cash inflow: The money coming into a business from sales, investments, loans, etc.  

Cash outflow: The money leaving a business to cover expenses such as rent, staff salaries and taxes. 

Net cash flow: The difference between a business’ cash inflow and outflow during a given period. This is a key indicator of a business’ financial health.  

The impact of seasonal fluctuations on cash flow  

A key cash flow challenge faced by many businesses in the UK is seasonal fluctuations in demand. Examples are retailers that sell products related to a specific period during the year such as Christmas, and hotels that have their highest demand during the summer.   

Business sectors that commonly face seasonable swings in revenue include: 

• Physical retail  
• Ecommerce 
• Tourism  
• Hospitality 
• Food production 
• Construction 

If cash flow isn’t proactively managed, seasonal businesses can suffer from gaps in cash flow and a shortage of money to cover all their costs. This is because income tends to be concentrated during certain months, but expenses remain constant throughout the year.    

Managing cash flow during seasonal peaks and troughs  

To prevent seasonal troughs in revenue causing problems, businesses should take steps to smooth out cash flow during the year. Actions to take include:  

• Properly identify peak and low demand seasons to fully understand your cash flow. 
• Create a cash reserve during peak periods to cover shortfalls during other times. 
• Apply for a loan, overdraft or another type of funding to cover financial gaps. 
• Launch new products or services to reduce dependence on a single season. 
• Reduce costs or remove unnecessary expenses during slow periods. 
• Take on temporary or freelance workers instead of permanent employees. 
• Negotiate flexible payment terms with suppliers. 

Effective cash flow forecasting  

Cash flow forecasting is one of the most useful financial actions a business owner can take.   

A cash flow forecast is used to plan how much money you expect to receive, and how much you expect to pay out, during a specific period of time in the future.  

The plan helps you to understand your business’ future income and make informed decisions to prevent any potential cash shortfalls. It is also a document that may be requested by certain external parties you deal with such as banks and investors. 

The key steps for creating a cash flow forecast are: 

• Decide on the forecasting period, such as the next six or 12 months  
• List all your expected sources of income 
• Estimate your anticipated expenses 
• Calculate your net cash flow for each month 
• Identify potential cash gaps and surpluses  

For more tips on cash flow forecasts, read this guide.    

Strategies for improving cash flow 

There are several ways you can improve your cash flow, particularly around invoicing and receivables. Actions to take include: 

Prompt and correct invoicing 

Unpaid invoices by customers can have a significant negative impact on a business' cash flow, so you should take steps to prevent late payment. Prompt and correct invoicing can help, the sooner your customer has their invoice the earlier the payment deadline.  

Ensure your invoice has all the necessary information needed. Even a small detail left off could delay the payment and impact your cash flow. Read tips on writing an invoice here. 

Chase unpaid invoices efficiently 

Missed payment deadlines can sometimes be due to a technical error or because the invoice has been genuinely missed, so regular reminders or a quick call to chase can help.  

Many online accounting software solutions have features that automatically send reminders to customers, so you don’t need to remember to do it yourself manually.  

Build good relationships with customers 

Try to get the name of someone to speak to in the accounts department of your customer. If there are any problems or delays with an invoice and you’ve built a good relationship with an individual and they can put a face or voice to the name, it will make it harder for them to let you down by paying late.  

Offer early payment incentives 

To get your invoices paid early and boost your cash flow you could offer a discount to customers.  

There are two ways to do it. A static discount involves offering a reduced amount if the customer pays by a certain date. Dynamic discounting means the discount is automatically adjusted based on when the invoice is settled, so the earlier they pay the bigger the reduction.  

Negotiating longer payment terms with suppliers 

If you are facing cash flow issues, you could try and negotiate longer payment terms with suppliers.  

It helps if you already have a good relationship with the supplier and you can make the deal mutually beneficial. For example, longer payment terms could mean you have extra funds to improve your sales and increase your order from the supplier.  

Read more tips on negotiating with suppliers here. 

Exploring funding options 

Securing business funding can help to manage your cash flow. Your options include: 

• Loans, overdrafts and credit cards 
• Grants from the government and other organisations 
• Invoice finance 

Leveraging technology for cash flow management  

Using software to manage your cash flow can help you to make smarter decisions.  

Your business’ financial data changes regularly, so software can provide a real-time snapshot of the money coming in and going out, which means that the decisions you make about your finances are based on the latest numbers and any key changes in your business. 

Your financial software will only be reliable if you’re keeping it up to date and the data being input is correct. Make sure you have a competent individual looking after your finances or you can look at outsourcing certain functions such as bookkeeping and payroll. While this will cost your business additional expenses this will save you time and give you comfort in your finances being correct and relied upon. 

Cashflow management tools can also connect with your bookkeeping software, and many use artificial intelligence to learn from your accounting data, spot trends, automatically generate your forecasts and alert you to potential upcoming problems.  

Examples of software are Xero, Dext and QuickBooks.

For advice on selecting the right accounting and cash flow software for your business, read this guide. 

How TaxAssist Accountants can help 

Cashflow management is crucial for the long-term survival of your business. For expert help on managing your cash flow to ensure the success of your business, call TaxAssist Accountants on 0116 2966 100 or use our online enquiry form.

Date published 18 Apr 2024 | Last updated 16 Sep 2024

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

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