Cash flow is the biggest financial concern for owners of small and medium-sized enterprises (SMEs) in many countries around the world. To illustrate this point, a recent survey of 2,672 SMEs in the UK, Germany, Italy, France, China, India and the US found that two-thirds of businesses were struggling to maintain a healthy level of cash flow. The situation is being made worse by longer payment terms being imposed by customers and a lack of affordable finance.
Perhaps counterintuitively, a lack of cash flow can actually be indicative of a successful business that is experiencing rapid growth. Growth can put demands on working capital that small businesses can struggle to meet. If this situation remains unchecked, an unsustainable level of growth can actually lead to the insolvency of the company.
With that said, what can small businesses do to improve their cash flow position so they can operate effectively and continue to grow?
Your tax obligations
According to the Federation of Small Businesses, tax payments prove to be a significant stumbling block for many small businesses. In fact, the average SME loses three working weeks to tax compliance every year, while 46% struggle to determine the tax rate they have to pay.
Failing to understand exactly what tax payments have to be made and when, as well how much must be paid, makes it difficult for businesses to budget accurately and create reliable cash flow forecasts. To make matters worse, if payment deadlines are missed, there are late filing penalties that must be paid, further impacting a business’s cash flow position. Many businesses are also unaware of the many tax allowances and reliefs which might be available to help reduce their tax bill.
One of the first decisions that has to be made is the legal structure of a business. Sole traders, partnerships, limited liability partnerships (LLPs) and private limited companies (LTDs) are all appropriate structures for small businesses, but they bring very different tax obligations. Understanding the financial implications of each should play an important part in the decision you make. Tax advisers and small business accountants will be able to help you understand the different elements involved in this decision.
Employees and resources
At the last count (November 2017), there were 5.7 million private sector businesses in the UK, 99.3% of which were small businesses. Those businesses account for three-fifths of employment and around half of turnover in the private sector. Small businesses clearly have a hugely important part to play in the economy, so anything that threatens their health, such as a cash flow shortfall, should be of concern to the government.
Many of the initiatives the government has introduced to improve cash flow, such as the Prompt Payment Code, have been limited in their success. Instead, many SMEs are finding their own ways to reduce costs to help boost their cash flow position, but without cutting their staff. They include:
- Leasing rather than buying business equipment
- Switching suppliers or renegotiating existing contracts with suppliers to find better deals
- Improving efficiency by going paperless
- Switching to VoIP phone systems and using cloud technology to enhance payroll processing and bookkeeping
- Reducing the interest payments on debts by paying off company credit cards
Cost-cutting measures can certainly help to boost cash flow in the short-term, but over the longer term, building a solid business budget which incorporates a SWOT analysis will give you a clear idea of the money coming in and going out of the business. This will help you make more informed business decisions without putting the company in a potentially risky cash position.
As the world continues to move online, more and more businesses are waking up to the power of internet marketing. Cutting marketing budgets might seem like a simple way to reduce costs and boost cash flow, but it can also have a hugely damaging impact on turnover.
Rather than cutting marketing budgets altogether or spending money on long-term brain building, consider refocusing your efforts on highly targeted online marketing that can have an almost immediate impact on turnover.
Other strategies small businesses are using to make the most of the marketing budgets include:
- Implementing referral schemes in return for discounts and perks
- Moving the marketing function back in-house (71% of small businesses now do all their marketing in-house)
- Making the most of free platforms such as social media
- Focussing on one campaign at a time
- Recycling marketing campaigns that have proved successful in the past
The simple way to boost your cash flow
At L&Z, our range of Direct Debit and card payment solutions help to maintain a regular flow of cash into your business and ensure you know exactly how much money you’ll receive and when. This gives you complete oversight over your income, which can help inform business decisions and allow you to budget effectively. To find out more about how L&Z can empower your business to grow, please get in touch with our team today.