Cash Flow for Small Businesses

Business outgoings

Cutting business costs

The most obvious way of improving your cash flow is to control your outgoings. Some areas where you could save money:

• Travel and travel expenses (conducting meetings over the internet for example)
• Moving internal IT systems to the cloud
• Use of contractors

However, you should be careful when it comes to reducing business costs. Cutting back too far may negatively affect your cash flow by hurting your ability to make sales, maintain relationships or create incentives for your staff.

Manage your stock

Stock that is sat in your warehouse for months is tying up assets in a non-productive way.

You need to understand the average time you hold your stock before you sell it as well as using your sales forecast to see if you are holding the right amount. Buying the right amount of stock and selling it on quickly will have a positive effect on your cash flow.

Supplier discounts

Just as you may want to reward good customers, your suppliers may want to do the same to you.

Make sure you pay promptly to negotiate better deals or discounts for early or fast payments. Tell your suppliers as early as possible if a payment is going to be delayed, just as you would expect a client to do for you.

Tax efficiency

A firm’s tax liability is likely to be a large part of its regular outgoings so any actions that increase tax efficiency will affect cash flow. Your businesses tax liability is likely to be a large part of its regular outgoings, so any actions that increase tax efficiency will affect cash flow. We won’t get into the nitty-gritty here, but don’t hesitate to contact your personal accountant who will be happy to help you explore tax planning.

Some examples of the tax reliefs that may apply to your business are:

• R&D relief – companies can obtain a 230% tax deduction for qualifying projects
• Holdover and rollover relief – postpone tax on the disposal of qualifying assets
• Patent box – reduces corporation tax to 10% for profits based on the UK or European patents

Payment reporting rules

From April 2017, large companies and limited liability partnerships are required to publicly report their payment practices and performed twice a year. This includes the average time taken to pay supplier invoices. Failure to publish the required information on time or giving inaccurate information is a criminal offence.

For SMEs that are having consistent problems with large companies and late payments this will have two main benefits:

• The ability to see a large customer's payment records before choosing to do business with them
• Identify companies with high average invoice payment times.

Forecasting your cash flow

Being able to accurately forecast your cash flow over a long period of time is incredibly valuable. If your business is seasonal in nature or has busy periods, you will be able to plan accordingly.

Before you can start creating a cashflow forecast you will need a:

• Sales forecast - how much you expect to sell over a period of time
• Profit and loss forecast - your business income and its day-to-day running costs, giving a profit projection
  These forecasts can sometimes be quite complex so seek expert help if you are unsure about any aspect

To create a cash flow forecast, you should look at the following:

• Money in = your sales forecast and any non-sales income
• Money out = your profit and loss forecast and any other costs (such as tax and Christmas parties)

The combination of these two figures is an estimate of your future cash flow.