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How to protect your cashflow (without the Big Business bad practices)

Cash flow is a common headache for small and medium-size businesses. Lee Murphy, founder of cloud bookkeeping software Pandle, give his top tips for protecting cash flow in your business.


Cashflow problems are the biggest danger to most microbusinesses, with many profitable microbusinesses going insolvent simply because they run out of cash. Of course, it is not just small businesses who get caught out, as Carillion sadly demonstrated earlier this year.

Many businesses, especially bully-boy corporates, improve their cash flow by simply paying their own invoices late.  Indeed, many big businesses are proud to be late payers, often insisting on terms up to 90 days or even longer.

Whether your business is just you or a small team, if you master your cash flow you will master your financial destiny.  Part of this is ensuring you have plenty of funds in the business as a reserve in case you hit a rainy day… or even a rainy quarter.

The first step to protecting your cash flow is to know what it is and when you will have to make big payments.

The importance of a forecast to master your business finances

A monthly cashflow forecast is the number one way of not heading for the rocks.  It shows your income and expenditure for every month for at least the coming year.

Make sure your forecast includes not just your suppliers, rent and any employee salaries, but also big lumpy payments like your annual corporation tax, quarterly VAT and any large regular and ad hoc payments.  These are particularly important because, if you have not set aside money, you may well not be able to pay them.

If you use cloud accounting software, then there should be a cash flow tool. Pandle, for example, gives real-time cash reporting and forecasting so that you can easily spot current or future problems and react.

A regular cashflow forecast is particularly important because most businesses that go under are not loss-making… instead, they simply run out of cash and cannot pay what they owe.

Indeed, with small businesses, a big problem is owners inadvertently spending the money in the bank thinking it is “theirs”, only to find down the line it was really the taxman’s and they are facing a nasty unexpected tax bill but no money to pay for this.

The importance of actively improving your cash flow

In addition to the cash flow forecast, which ensures you know your incomings and outgoings, so you don’t spend money you will need down the line, many small businesses overlook the importance of taking every opportunity to get paid early.

As many will know, sadly the longer an invoice goes unpaid the more likely it is that there will be problems.

The good news is that with the wide range of bookkeeping software available online, often free, it has never been easier to master and even automate many of these tasks, so you can get as much as possible done with the minimum effort.

Here are some areas to consider for your business:

  • Review your payment terms and see about making them shorter. So, for instance, reduce from 28 days to 14 or even 7 where customers will agree.
  • Rather than invoice everything on completion, invoice as much as possible at the start or in stages.
  • Don’t just chase invoices when they are really overdue. Instead, send a reminder a couple of days before it is due, and then start chasing politely but firmly and frequently as soon as it overdue.  You will be surprised the impact this has, and some bookkeeping packages will automate this, so you don’t have to do it.  Otherwise, if you really hate chasing overdue invoices, pay someone to do it!
  • If you incur expenses then charge these on, make sure you get paid in advance for these before incurring costs.
  • Consider giving a discount for people who pay in advance, especially those who pay quarterly in advance if you have people on monthly contracts. Also, where possible get people onto standing orders or direct debit so you are in control.
  • Also, consider the way you buy things and the impact this is having. For instance, spending a lot on a piece of capital equipment may save you money over the long term if you use it well.  But maybe you won’t… in which case it becomes an expensive white elephant.  Either way, look at other ways to turn big upfront costs into small monthly payments – whether through leasing or other alternatives.
  • Above all, always try to negotiate the price down on anything you buy. Many don’t realise it, but the two best ways to improve profits and cash flow quickly are to put up your own price and reduce your own costs.  Both have a much bigger impact on profits than increasing sales… and they also bring rapid cashflow benefits too, whereas increasing sales often hurts cash flow in the short term for many businesses.