How to stop cash flow being a big issue for small businesses 

Cash flow is something that we see day in, day out as an issue for small businesses and sole traders. There’s no getting away from the fact that it is a real dampener on your Business, if not catastrophic. It needs to be addressed quickly.  

What can cause cash flow problems?

Cash flow stumbling blocks are of course common, especially within the contracting sector. The sad reality is that more than half of SMEs, in general, don’t survive longer than five years and poor cash flow is a very good indicator of things going downhill. If a small business is to survive its early years, cash flow needs to be tackled head-on. 

Taking a step back and considering your options for improving this situation can work wonders.

Often stemming from bad debts, cash flow problems usually exist because of those niggling debts that can’t be recovered. Unfortunately, many contractors and those starting out in trades have to seek help to avoid defaulted payments, and things can quickly spiral out of control if action isn’t taken.

How do I protect myself from cash flow problems?

It might sound obvious, but you should always have credit control systems in place to collect any money that is owed from customers. There can be no doubt that prioritising the efficiency and effectiveness of this system is important, especially if your company is in its early and most vulnerable stages. This is often the time when your reputation doesn’t precede you yet, contracts are hard to acquire and funding is critical.

As long as you keep your books up to date – which you always should – the process is usually straightforward. However, this is not always the case.

Many companies simply need to set aside time to administer reminder emails and letters, and to pass anything overdue to recovery firms quickly. The sooner this kind of action is taken, the better. Improving your cash flow is all about urgency. 

Can I take a risk, even if I suspect a customer won’t pay?

This is, of course, your call. High profile collapses of construction giants like Carillion and warnings being issued for other big names should be enough to warn anyone off accepting contracts that aren’t signed, sealed and promised to be delivered.

This doesn’t mean having to refuse custom if credit records are poor, but you should put measures in place such as deposit requests or partial invoices to avoid problems further down the line. The nature of contracting means the latter option should be acceptable as clients and customers see physical, tangible progress on projects.

Where to start, though? This seems a complex process…

Starting on the right path to better cash flow can seem daunting, but is worth it in the long run when no gaps are evident in your business and you aren’t losing sleep over these matters.

Bookkeeping, although often an arduous task, is often an area where small businesses trip up. There’s lots of information out there on the initial start-up costs of various businesses, but little about how many working hours an individual needs to put in for the first months and years of a start-up. These can sometimes verge on the ridiculous.

Many directors and small business owners simply feel that they don’t have enough hours in the day and assume that they can catch up with bookkeeping later. This is often the root cause of cash flow problems – the sooner the issue is caught, the more likely it can be addressed.

It is so important to put a few hours aside to work on your company rather than for your company. If you are experiencing cash flow problems then you are not alone. This especially rings true if businesses are still within the first few years of company incorporation. These first years tend to be a huge learning curve.

As long as you are aware of these issues then you can tackle them head-on. Having this under control means you can focus on what’s important: running your business, doing a great job and exploring new ways to diversify or innovate.

Rick Smith is the managing director of Forbes Burton, a company rescue and insolvency specialist based in Grimsby

Back to top button