The Bionic guide to small business cash flow

Les Roberts, Senior Content Manager at Bionic
By Les Roberts, Senior Content Manager

Managing cash flow is one of the most vital things for small businesses to stay on top of. No matter how successful your business is - or is going to be - a poorly managed cash flow situation can scupper you before you even get going.

However, small business cash flow management is notoriously difficult, particularly for startups. That’s because you may need to spend more cash than you are taking in as revenue, even if your business is otherwise well run and solvent.

This guide will help you to understand how to better manage your business cash flow and what you can do if you run into problems.

What is cash flow?

Cash flow is the net balance of money that comes in and goes out of a business. If your cash flow is positive, then you have more money coming in than you have going out. 

If your cash flow is negative, your outgoings are more than your incoming. This is when cash flow issues can arise and you could find your business isn't able to meet all of its running costs. 

Why is cash flow important to a small business?

Cash flow is the lifeblood of business. If you have a constrained cash flow, it could affect your ability to invest in stock, equipment or staff, or to pay any outstanding debts you may have.

Keeping an eye on your cash flow is particularly important if you are a business where revenue is not steady - if, for example, you cannot guarantee when customers or clients will pay their invoices. If this is the case, there is a danger that you could run out of cash at a vital time.

You will also need a healthy cash flow to pay for any unexpected costs that may arise, especially if you are a new business. If you do expect any problems with cash flow, then a business cash flow loan could be the solution.

How can a business run into cash flow problems?

There are myriad ways that any small business can run into cash flow problems, and knowing some of the common causes of these issues can help you to either avoid or manage them.

Things to look out for include:

  • Underestimating startup costs - There are many, many costs associated with starting a new business and some of these may not be immediately obvious. That’s why underestimating your costs when you are getting your enterprise off the ground is a very common cause of cash flow trouble for a startup business.
  • Expecting profitability too quickly - Just as they might underestimate startup costs, many new businesses may also have overly optimistic forecasts in terms of their profitability. Many successful businesses take longer than they expected to start generating revenue, leading to constrained cash flow.
  • Overlooking high overhead costs - Cashflow problems are more likely if your business has a large number of overhead costs. These could include rental payments for vehicles or premises or even extensive staff travel requirements. Cutting your overheads, if it’s viable for your business to do so, is a quick way to help maintain a healthier cash flow.
  • Collecting receivables too slowly - However successful your business may be, if customers are slow to pay then you will find yourself short of cash. Invoice financing is a type of cash flow finance for small businesses that could help to address this all-too-common problem.
  • Growing too quickly - You may think that growing your business quickly is good news. And, in general, you’d be right. However, sometimes it can be problematic. For example, if you start receiving big orders from clients and have to increase your production capacity or staffing to cope with them, you may be left short of cash to pay their wages. In cases like this, short-term financing solutions, such as business cash flow loans or bank overdrafts, might be the best way to go. 
  • Low profit margins - Profit margins are perhaps the most important metric to look at when assessing the financial health of a business. No matter how many sales you are making, if your prices are too low or overheads too high, then your profit margin will be small - and this, in turn, can lead to cash flow issues. Raising prices, even by just a fraction, is an excellent way to increase cash flow for a small business.
  • Not creating a cash flow budget - A cash flow budget is an incredibly useful tool when it comes to learning how to build cash flow. A cash flow budget keeps track of what cash you expect to receive and what you expect to spend in any given month. It can give a snapshot of your cash flow position at any time, and help you to anticipate problems.

How does a cash flow forecast help a business?

If you are serious about managing your cash flow effectively, getting and maintaining a cash flow forecast is a great place to start. A cash flow forecast (or cashflow budget) can be used to help you visualise all possible expenses your business might incur over a given period of time, and how much it could expect to recoup in terms of payments from clients.

A cash flow forecast can be created on a monthly, quarterly or annual basis. If your business is relatively large, you might want to get help from an accountant. However you choose to put one together, a forecast is likely to be an important tool to stop you from getting into cash flow difficulties.

A cash flow forecast should include the following incoming and outgoings over the specific period you're forecasting:

  • Cash inflows - any money the business brings in from pending invoices, sales revenue, investments, loans and sales of company assets.
  • Cash outflows - any money the business pays out, including wages, operating expenses, and loan repayments.

Should a cash flow forecast include VAT?

If your business is VAT registered, then you're probably used to drawing up profit and loss forecasts without including the VAT for anything you can claim back. But VAT must be included in all cash flow forecasts because you need to include the full amounts that you'll be paying in and taking out of your business bank account

Should a cash flow forecast include loans?

Any money your business brings in from a loan and any repayments made out on a loan should be included in your cash flow forecast. Possible exceptions to this include long term business loans and commercial mortgages, which might not figure in the cash inflows section of your forecast.

How to manage your business cashflow

Now you know how important keeping tabs on cash flow can be, you might want to think about how best to manage it. Here are some things to keep in mind:

  • Keep your books accurate and up to date - Good bookkeeping is key to any successful business. If you know what money is coming into your business and what expenses you are going to incur, you will have a much greater chance of staying on the right side of cashflow problems.
  • Don't be too lenient with your customers - There is a tough balance to strike when it comes to chasing payments from customers. You don’t want to be overzealous and scare off someone who might be a reliable, regular customer. But at the same time, if you are waiting too long to get paid, you could end up in trouble and even, in a worst-case scenario, go out of business.
  • Keep your accounting simple - This is particularly good advice for a new business. If you need to, hire a professional accountant to help. It’s better to spend the money on an expert than to get into trouble because you are unable to stay on top of things.
  • Keep your business and your personal finances separate - A mistake many small businesses make when starting out is to mix personal and business expenses. However, unless you keep these separate you may not know how much revenue your business is truly generating, and cash flow issues could sneak up on you very easily.
  • Build a cash reserve - Building up a good cash reserve is perhaps the best thing you can do to shield your business from cash flow worries. With a strong cash position, you can both protect yourself from unexpected expenses like a large tax bill and take advantage of new opportunities that require a large initial outlay - for example, a big order from a new customer.

How is cash flow financed?

Cash flow is usually financed through the money paid into your business in exchange for the goods or services you offer. But if you're in negative cash flow, you might use other short term funding to make up the shortfall until you return to positive cash flow or are at least breaking even.

This funding could come from a business savings account or a personal savings account, although using personal funds for business purposes can complicate your finances. 

Or you could consider taking out business finance. The most common options to cover cash flow are a merchant cash advance, where you borrow money against future card transactions, or invoice finance, where you borrow money against the amounts owed to you on unpaid invoices. 

There are other types of short term business loans you could use, such as a working capital loan, but it's important to recognise that borrowing isn't a long-term solution to cash flow issues.

How can business finance from Bionic help with cash flow?

If you are worried about your business cash flow, Bionic can help compare a range of business loans to help you find the right finance solution. We can source business cashflow loans from dozens of lenders, offer advice on the right loan for you, and get you the best price on the market.

If you need a different type of financing, our team of experts can talk you through what other options might be available.

Give us a call today if you have any worries about how cash flow might affect your business.