Managing cash flow during uncertain times is challenging for every founder, whatever industry you belong to. Even if times are good, you never know when things might change. That's why it's important to know how managing cash flow could help you during times of uncertainty and why it's sometimes a better bet having available cash at your disposal.
What is cash flow?
Cash flow, also known as liquidity, is the movement of money in and out of the business. It is the company's oxygen and, therefore, a very important aspect that business owners need to manage if they want to grow their business.
Why is it important?
Poor cash flow management can lead to liquidation and the end of your business. The Federation of Small Businesses reports that 50,000 businesses go bust each year due to liquidity problems caused by late payments.
Current economic outlook
The UK is experiencing inflation of 10.1% compared to a target of 2% set by the Bank of England. This means that the price of goods and services is rising extremely quickly. The main contributor to this is the rising price of fuel. This is affecting businesses by increasing expenses and depleting cash reserves.
Rising interest rates
The government has raised interest rates to combat high inflation by slowing down the economy. This increase in the cost of borrowing means that businesses will find it harder to obtain bank loans or overdrafts. It also means that the current cost of borrowing would be significantly larger, this can push businesses that are already struggling financially over the edge.
The rising rates result in a lower demand for goods and services as consumers have less disposable income available and are forced to cut back. Higher interest rates can also incentivise individuals to save money rather than spending and increased costs in our economy can impact the customer's ability to pay.
All these factors can result in negative cash flow and hinder the growth and success of the business, so it's vital businesses are prepared.
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Tips for managing cash flow
Below are a few tips business owners should consider if they want to manage cash flow during uncertain times.
Cash flow forecast
It's vital to track your cash flows in times of uncertainty and good times to assess how your business is performing. Preparing a cash flow statement can help you determine which activities generate cash and which are sucking cash out of the business.
Setting a budget is also recommended as it allows you to monitor your spending, giving you a stronger financial stance in your day-to-day operations.
Review your contracts
If you have contracts expiring, consider if there is a necessity for you to renew. If your business needs the service, try and source alternative affordable suppliers to reduce cash outflow.
If possible, try to enter into contracts with suppliers at agreed rates for a fixed period. This gives you some certainty in volatile times and allows you to budget for your costs accordingly.
Depending on the contracts you review, be careful when you fix them for a long time. Interest rate hikes are already priced in, so if interest rates drop, you could be fixed into unfavourable deals depending on how long the economy takes to recover.
Hybrid or remote working model
Think about cutting unnecessary costs like your office rent. If you have a hybrid working model, and the office isn't getting used much yet rent, and utility bills are still being paid, maybe it's worth finding somewhere smaller or trialling out co-working spaces.
If you are currently in the office full-time, try and asses if changing to a hybrid model would be a beneficial step for your business. CIPD reported that in 2020, 33% of employers reported increased productivity due to home working. This rose to 41% when employers were surveyed in 2021. At the same time, the number of employers who reported negative effects on productivity due to home working had fallen. Consider if remote or hybrid working might be a potential option for your organisation.
Offer a discount
One way to generate positive cash flow is to offer discounts to suppliers for early settlement of invoices. If you find that your customers are taking longer to pay you back or you are experiencing a fall in sales, think about enticing clients with a discount.
Below is a list of offers you can use to try and increase sales:
- free shipping
- free trial
- BOGOF offers
While there are many things you can do to improve your cash flow, be careful that your productivity or business is not hindered. If you cut certain employee benefits or the training budget, this may be demotivating to staff, and your business will suffer from a brain drain.
Here are some ways in which you can cut costs:
- Review and amend current benefits
- Outsource roles
- Go paperless
- Buy refurbished equipment
While uncertainty is hard to plan for, try and consider which strategies for managing cash flow can help you keep your business afloat.
The opinions on this page are for general information purposes only and do not constitute legal or financial advice on which you should rely.