10 ways to safeguard your cash flow
Rising insolvencies and record numbers of businesses in significant financial distress highlight why businesses need to safeguard their cash flow. What are you doing to protect yours?
The latest Red Flag Alert research for Q2 2021 has recorded 650,000 businesses in ‘significant financial distress’. After the first quarter of the year, this is the second highest distress level ever recorded by this research, and coincides with new figures which revealed rising insolvencies.
According to the Insolvency Service, company insolvencies in England and Wales increased by 31% in Q2 2021.
The news comes amid growing concerns about the amount that businesses have borrowed using government loan schemes during the pandemic.
The first repayments for the Bounce Back scheme and Coronavirus Business Interruption Loan Scheme (CBILS) are now due.
With the failure of one business causing a domino effect on others in its supply chain, the risk of bad debt and the impact that can have on any business’s cash flow is something business owners simply can’t afford to ignore.
Fortunately, there are various ways that you can protect your cash flow and reduce the risks of this domino effect.
Here we look at 10 ways you can safeguard your cash flow.
1. Regularly update cash flow forecasts
Regularly update your cash flow forecasts with anything that could impact your cash flow including late payments and price increases.
This will help you spot cash flow shortages before they happen.
Should you anticipate a cash flow shortfall, it’s vital that you act quickly to protect your business. Don’t just bury your head in the sand and hope it will fix itself.
2. Keep on top of your sales ledger
Knowing exactly when each invoice will exceed terms will allow you to spot potential cash flow shortages and take the necessary steps to safeguard your business.
By showing which invoices have and haven’t been paid, the sales ledger provides an instant overview of the success of your company’s credit management.
Should a high proportion of invoices be unpaid beyond the agreed terms, you may wish to consider ways to improve your credit control processes and procedures or seek professional support to recover outstanding amounts.
3. Spread your customer base as widely as possible
Losing any client is undesirable, but losing a customer which accounts for a large portion of your revenue can destroy a business.
Therefore, to protect your cash flow it’s vital that you spread your customer base as widely as possible.
When a single customer comprises a large share of your business, losing that customer can have a devastating effect on revenue, profit, and cash flow.
In contrast, having a wide customer base can help to mitigate the risk of over-reliance on a single customer for your income.
It also gives you freedom to say ‘no’ if a customer demands unfair terms that could damage your cash flow.
4. Get to know your customers
In your personal life you wouldn’t loan large sums of money to a stranger without getting to know them first, so why do so many people do it in business?
With the UK’s current late payment culture and increased threat of insolvency, it’s more important than ever to know your customers before offering credit terms.
This can be achieved through performing credit checks, which will give valuable insight into the financial status and creditworthiness of your customers.
This is important for new customers, but don’t forget about your existing customers too. Circumstances can change at any time which could put your cash flow at risk.
5. Consider your funding options
Funding options exist that are specifically designed to help boost your cash flow.
Invoice finance, for example, allows businesses to access up to 90% of the value of an invoice within 24 hours of its issue. This is a great way to bridge the gap that can be caused by trading on credit terms.
Additionally, with some facilities, you can reduce in-house overheads and improve collection times with the use of the lender’s dedicated sales ledger management service and/or credit protection.
It is also possible to fund single invoices through spot factoring. This provides fast access to the cash tied up in unpaid invoices without the need for a more permanent facility.
It’s a particularly good option for high-value invoices or those with long payment terms.
6. Secure credit insurance
You likely have public liability insurance, vehicle insurance and buildings and contents insurance to protect your business. But do you have credit insurance to safeguard your cash flow?
Credit insurance – or debtor protection – protects a business’s cash flow from the threat of bad debts, whether due to insolvency or protracted default.
With various options available, credit insurance solutions can be tailored to your needs. Protection can be provided against your entire debtor book, key customers or just single debtors that may have an adverse credit history or have placed an order of a particularly high value.
7. Regularly benchmark suppliers and prioritise expenses
Another way to protect your cash flow is to regularly review your outgoings.
This process of checking and benchmarking internal and external costs can save your business money and improve your bottom line without too much effort.
However, always remember not to cut back too far.
Many of the tools your business uses will bring real value to your staff and greatly improve your procedures.
So, try and calculate the value in everything you use. Then cut or replace those that aren’t giving you a good return on investment.
8. Build a cash reserve
A cash reserve is money that a business sets aside for use in emergencies. These savings can cover any shortfalls or unexpected costs and expenses that might arise.
Whilst there is no guaranteed formula for getting your business to survive any situation, it’s clear that having a healthy cash reserve buys you time and peace of mind when disaster strikes.
9. Encourage customers to pay earlier
When trading on credit terms there is typically a cash flow gap between providing a service and getting paid.
Finding ways to bridge that gap and keep cash flowing freely through your business can help protect your cash flow.
For example, early settlement discounts provide an incentive for customers to pay promptly. This ensures you receive payment within terms.
Whilst this means you would get paid slightly less, it can be more beneficial to your business to be paid the majority of an invoice’s value early than it is to receive the full amount outside of terms or not at all.
10. Use technology to your advantage
Research suggests that slow internal processes and a lack of automation are a leading cause of late payments.
So, consider whether there’s new software you could also invest in to save time at your end.
For example, transitioning to a digital invoicing system can help improve your cash flow and payment times.
As well as this, by providing a centralised view of incomings and outgoings, a digital invoicing system can help your accounts department to further protect your cash flow.
Can we help?
If you’re looking for cash flow support, as an independent finance broker we can help you to find the ideal solution.
With more than 20 years’ experience, we’ll listen to your challenges and requirements before using our expertise of the finance market to find the facility that will work for you in the short, medium and long term.
So, if you need help protecting your cash flow, contact our team on 0800 9774833, or request a call back and we’ll be in touch at a convenient time.