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In its simplest form, cash-flow is the flow of money into and out of your business. Positive cash-flow, the true life blood of any successful business, will show more cash flowing in than out.

It doesn’t matter how well marketed a business is, or how incredible its products or services are, if the cash-flow dries up, the business dries up with it.

Healthy cash-flow lets businesses flourish by allowing them to take fast advantage of strategic opportunities that turn up, and by offering a safety net during the unpredictable moments that all businesses experience from time to time.

So what causes cash flow management problems for small businesses and what can they do about them?

1. High or poorly managed overheads

Ongoing bills are an unavoidable part of operating a business – rent, power, vehicle expenses, payroll, marketing – the list goes on and on.

Having these expenses factored into financial forecasting can avoid unpleasant surprises and keep your cash flow manageable.

  • Budget for predictable bills by breaking them into weekly rather than monthly payments
  • Before signing up to any ongoing expense, ask yourself whether it is workable within your cash flow forecast – if you don’t know the answer to that question, don’t commit until you do
  • Have a marketing plan and budget and stick to it
  • Negotiate with suppliers.


2. Inefficient payroll and staff management

When a business’s cash flow situation starts to impact its ability to pay its own staff, things can snowball into chaos. Low staff morale can have an impact on both productivity and loyalty, and what started as a cash flow problem can quickly turn into something much more serious – damaging your customer relationships and brand image.

Employ wisely. Factor seasonal fluctuations into your hiring schedule and use automated payroll software that collates timesheets, deducts accurate tax rates and facilitates clear communication with staff around their pay. This takes the unpredictability out of payroll and frees you up to get on with the business of running the business and generating positive cash-flow.

3. Over Stocking

Few things tie up cash like an overstocked warehouse. Stock management is fundamental to keeping cash moving in small businesses – an over-investment in stock will mean that your cash is sitting on shelves rather than working for you.

  • Minimise how much of your cash is piled high by analysing your customers’ habits and learning about their needs
  • Know what stock will move, and when, and buy accordingly
  • If your business has seasonal factors, consider these too
  • Be organised – use accurate inventory systems.  


4. Unrealistic profit margins

Poorly calculated profit margins can undermine small business cash flow management. It is vital to look beyond the gross profit margin of an individual product or service to the net profit of the entire business.

Factor everything in, right down to payroll and paperclips.

Sales and price-slashing can often seem like a way of generating much needed spontaneous cash-flow but for many small businesses the cut to profits can damage their brand and potentially cause deeper ongoing problems.

Knowing your break-even sell-point gives you a base to work from and can minimise these dangers significantly.  

5. Slow-paying or no-paying customers

When customers are slow to pay for the goods or services that they have received, cash-flow suffers, and time and resources get used up in trying to complete the exchange.

To minimise the possibility of customers being slow to stump up with their payments, or not paying at all:

  • Lay out clear, fair terms of trade from the beginning  
  • Make sure payment details and options are obvious
  • Leave no room for ambiguity in your expectations
  • Be transparent about the consequences to the customer if they move outside the parameters of your terms.


6. Forgetting to forecast

Projections of income and expenditure can never be fully accurate and so it’s easy to write off financial projections as a waste of effort and many small businesses do.

But over time, with consistent planning and reassessment, forecasting patterns emerge and trends start to show themselves. This information is business gold – and will allow you to know when to save and when to splurge, without negatively affecting your overall cash flow.

Your cash flow forecast should look like this:

  • actual balance to start with
  • projected income over a period of time (week, month, year)
  • projected expenses over the same period of time
  • expected final balance at the end of the period of time
  • The difference between your starting balance and your final balance

With a little history behind you, you will begin to see growth (hopefully), patterns and clues which will help your business perform more efficiently. The more detailed your forecast (categorising income streams and expenses, for example), the more in-depth the data insights.

Ultimately, the devil is in the detail. If you know where you stand financially, understand your customers and look after your staff, your cash flow will become manageable and you can spend more time taking care of business. If you’d like to reduce your payroll administration headaches and free up time, check out our easy online payroll service.

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