Managing Your Cash Flow: A Guide For Small Businesses In Tough Sectors

Business people working at office desk, they are checking tax forms and calculating costs, finance and management concept

One of the main tenants of running a business is to keep the cash coming in, and make sure that there’s more entering the company’s accounts than there is leaving them. That isn’t always easy, especially for small businesses.

Also, in certain sectors where there are seasonal fluctuations, long waits before projects are completed or unusual payment structures, monitoring and managing cash flow can be difficult. Construction is one industry that often faces a multitude of cash flow issues, which can cause businesses significant problems or even lead to bankruptcy. Businesses like season hospitality firms and agencies with varied payment plans can also have problems, and for all these businesses, managing cash flow correctly is essential.

To help, we’ve listed some practical ways that companies across any sector that struggles with cash flow can manage it and improve their chances of success.

Understand Your Cash Flow Process

The first step is to understand your business’s cash flow and how it currently works. Start by conducting a thorough analysis of your cash flow. Identify where money is coming in from and where it is going out. Once you understand this, you can build a cash flow forecast to anticipate incoming and outgoing expenses. Doing this once isn’t enough: it should be a regular exercise in your business to ensure you’re always on top of your cash situation. With a thorough understanding of your cash flow situation, you’ll be able to manage it more effectively and make informed decisions.

Consolidate Your Debts

Generating debts is easy when your business struggles with its cash flow, but paying off multiple creditors can be difficult to manage and lead to higher bills than anticipated. You might find that some lenders raise their rates with inflation while others have you locked into a specific payment plan. If you don’t manage your debts efficiently, then you might also find that you end up having to pay late-payment charges, which will add to the overall cost of your debt. To improve your debt management and reduce the overall cost of paying off your business debts, consider consolidating them into one loan. Explore the options for small business loans from brokers like Capalona, which offers quick approvals and a range of products to help you find the right one for your company. You’ll then be able to manage your debts easily and know exactly how much you have to pay.

Make It Easier For Your Customers To Pay With Technology

Having an efficient and smooth payment process can significantly improve your cash flow by accelerating the speed at which payments are received. This approach can not only contribute towards better liquidity, but it can also enhance the customer experience. To make it easier for your clients to pay their invoices, you should consider incorporating new technologies. For example, digital invoicing systems can automate invoice generation, dispatch, and follow-ups. Many even allow customers to pay directly from the invoice, speeding up the payment process. Also, digital payment gateways or platforms can simplify the process of accepting and processing payments. They can also provide additional security for both you and your customers. Using technology to improve your payment process can reduce the chances of late payments because of uncertainty and save your staff’s time and effort.

Offer Discounts For Early Payment

Another way to improve the chances of your business getting paid early is to offer a discount for any client that makes payment before the date listed on their invoice. While early payment discounts can be a powerful tool, they aren’t without costs. Essentially, you’re sacrificing a portion of your income in return for faster payment. Before implementing such a discount, it’s important to weigh this cost against the benefits. Consider the financial impact if a large proportion of your customers take the discount, and ensure it won’t harm your profit margins excessively. It might be useful to start with a small discount and adjust based on response and impact. It might also be worth considering incorporating the discount into your pricing structure, to ensure that your business isn’t left out of pocket. When customers pay invoices ahead of the due date, it results in more immediate access to cash, allowing your business to better manage its expenses and investments, so it’s worth trying this strategy out to improve your company’s cash flow.

Build Up A Cash Reserve

Once you’ve streamlined your debts and started working towards paying them off, or have completed payment, you can start thinking about building up a cash reserve, which is essentially your company’s savings. A cash reserve is your business’s safety net, which is set aside for unexpected costs or financial uncertainties. In an unpredictable business climate, especially in tougher sectors, having a financial buffer can be the difference between survival and closure, so you need to work to build up a cash reserve for your business. To ensure you always have enough cash on hand in case of an unexpected expense, make the building of your cash reserve part of your ongoing business strategy. Whether you choose to put aside a certain percentage of your monthly profits or a fixed sum each month, you need to make sure that your business always has enough cash stored away just in case.

Monitor Your Key Financial Metrics

Keeping a close eye on your financial metrics can provide an accurate picture of your business’s health, help you make informed decisions, and enable you to spot trends or potential issues before they become problematic. It also means that you can understand your cash flow within the context of your business’s entire financial situation. Monitor your key financial metrics like profit margins, expenses, receivables, payables, net profits and inventory. It can take time to manage these metrics manually, but thankfully, modern accounting software can automatically track these metrics and present them in easy-to-understand formats.

Explore Alternative Revenue Streams

If your business is struggling with cash flow from its main source of income, consider alternative ways to bring in more money to your organisation. Diversifying your revenue streams can help stabilise your income, provide additional cash flow, and increase business resilience. While diversification can provide numerous benefits, it’s important to ensure any new revenue stream aligns with your overall business strategy and capabilities. Be mindful of spreading resources too thinly or venturing into areas where you lack expertise. Diversification should be a calculated move, done in a way that enhances your business rather than dilutes it. For small businesses in sectors with cash flow challenges, incorporating new revenue streams can provide a lifeline, helping you to navigate through challenging times and setting the stage for future growth. Explore ways you can expand your revenue stream using the assets and team members you already have. For example, seasonal hospitality businesses could offer to hire out their venues for events during the off-season to give them alternative ways to earn extra money to keep their cash flow stable.

Keep Reviewing Your Prices

Over time, the cost of running your business is likely to increase due to inflation, higher labour costs, more expensive raw materials, and more. Regular price reviews ensure that your prices keep up with these rising costs. Half of all UK small businesses are currently looking to raise prices in 2023 thanks to these increasing costs, so you need to make sure that you’re doing the same if you aren’t already. Price rises should be passed onto your customers to ensure that your business isn’t absorbing too many additional costs. It can feel awkward to raise your prices, but it is an important part of running your company. If you need to increase prices, communicate this to your customers in advance and explain why. Most customers understand that price changes are a part of doing business, particularly if they are communicated transparently and in a timely manner. Regularly reviewing your prices to reflect changes in costs, market conditions, and the value you provide helps to maintain profitability and cash flow, is crucial for the long-term success of your business, especially in sectors where cash flow is a challenge.

To Conclude

Overall, managing cash flow can be a challenging task, especially for small businesses operating in sectors where there are fluctuations in payment times, such as those with long contracts or seasonal businesses. However, managing your cash flow is absolutely essential for survival and growth, so even if it’s hard, small business leaders in these sectors need to be prepared and have strategies in mind. By using this list of practical tips, you can ensure that you’ve got options and are proactive. These strategies are not just about keeping your business afloat during difficult times; they’re about setting the stage for sustained success. Remember, a well-managed cash flow serves as the backbone of your business, supporting its viability and enabling opportunities for expansion. Your commitment to regular review and adjustment of your cash flow strategy will help ensure your business not only survives but thrives, regardless of the challenges you face in your sector or the economy as a whole.