Four ways to prevent cash flow problems in your business

It's been a tough few years for SMEs. The cost-of-living crisis has affected businesses directly and indirectly, from fuel prices impacting delivery to the inflation of goods lowering consumer spending.

It would be reasonable to assume that fewer people are planning to start their own businesses since economists warn the UK will suffer the deepest and longest recession of all G7 countries.

But it seems that entrepreneurial spirit isn't in decline. A recent study found that a third of adults were thinking of starting a business in 2023.

With 82 percent of small businesses failing due to poorly managed cash flow, budding companies should be aware of this issue before getting started. Considering this, I share my advice for how new businesses can avoid cash flow problems to ensure their stability.

Implement cash flow forecasting

Budgeting and forecasting are essential for helping businesses establish their financial strategy and avoid potential pitfalls.

Forecasting predicts revenue based on historical data, helping the business to identify the amount of capital needed for growth and to cover shortfalls. As the company grows, it is crucial to forecast its income and expenses and ensure they align.

Companies might also benefit from a flexible approach such as zero-based budgeting (ZBB), which involves starting each accounting period from a 'zero base'.

Business expenses are reassessed and reapproved for each period, rather than the budget being based simply on past spending. This is effective for analysing costs and resource planning.

Zero-based budgeting can eliminate waste, highlight areas of greatest value and focus managers on maximising profitability, to align with the company's strategic goals.

It is used successfully by multiple large, global companies such as Diageo, (owner of Guinness) which generates annual productivity savings of around £400 million, partly due to the help of zero-based budgeting.

Cut overhead costs

Monthly expenses can quickly add up and lead to months of expenditure without much income. And with recent reports that the UK recession could be 'twice as bad' as originally expected, SMEs should be looking to cut down on these costs where possible.?

One way that businesses can limit unnecessary overheads is by negotiating a better deal with suppliers. Find a way to compromise with lower prices, or if necessary, look elsewhere for cheaper suppliers.

A company may also choose to embrace a remote or hybrid working setup. Limiting office space will save the company money by not having to pay for property taxes or rent, equipment, electricity, water, and many other costs from having employees in the office.

And it seems that many employees would prefer this. A recent survey of 5,000 randomly selected UK workers found that 19% want to work from home 5 days a week, and many more would favour hybrid working.

Lastly, businesses should be regularly auditing expensive services outgoings. This will clarify whether there are unnecessary expenses that can be cut.

Reduce lead times

Suppliers must rely on their network to produce goods for export. Long supply chain lead times can quickly create a cash flow problem for SMEs if the processes of production, delivery and payment aren't in alignment.

Automating inventory management systems and other tasks where possible will streamline the supply chain process, helping to lower lead times and prevent gaps in production processes.

Many business decision-makers may feel this is out of scope since only 18% of small businesses use inventory management software due to a lack of resources. However, investing in this software should be a priority for SMEs because it improves supply chain operations, which are crucial to improving cash flow in the long term.

Another way to lower lead times is by reducing bulk orders. Orders are instead smaller and more frequent. While this may increase delivery costs, a faster supply chain will save the company money in the long run.

Diversifying suppliers will make the company less reliant on a limited range of suppliers, reducing risks and creating competition. Looking for more local suppliers will also reduce lead times.

Seek alternative financing

Traditional bank loans may not suit all SMEs in need of liquidity, particularly during a recession.

Banks have restricted the help available to SMEs that require capital, especially those in the international trade sector which are seen as 'risky' for banks. If such a company obtains cash flow finance from a bank, it's often given extended repayment agreements with high interest.

Banking assistance can often be time-consuming and difficult. And according to a recent survey, over two-thirds of SMEs globally have been unable to secure funding from business loans.

Luckily, there are many alternative financing options. The first is invoice financing, which involves a third-party finance company advancing money on unpaid invoices. This avoids cash flow problems caused by money being tied up for months in unpaid debts.

Other options available to SMEs include establishing a line of credit, peer-to-peer lending, crowdfunding, and working capital loans. With the UK's recession, one financial services trend in 2023 will see many businesses turning to alternative financing.

About the Authors

This article was originally published in the Startup Observer.

Stenn is the largest and fastest-growing online platform for financing small and medium-sized businesses engaged in international trade. It is based in London, provides financing services in 74 countries and is backed by financial giants like HSBC, Barclays, Natixis and many others.

Stenn provides liquid cash to SMEs within the global financial system. On stenn.com you can apply online for financing and trade credit protection from $10 000 to $10 million (USD). Only two documents are required. No collateral is needed and funds are transferred within 48 hours of approval.

Check the financing limit available on your deal or go straight to Stenn's easy online application form.

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