How to create a positive cash-flow position: 5 simple steps

29 May 2018

Cash flow is the lifeblood of any business. But poor cash flow is still a key financial concern for the UK’s start-ups, as well as more established small and medium-sized businesses (SMBs). So how do you go about promoting positive cash flow?

52.1% of UK SMBs are in a positive cash-flow position according to figures for March 2018 from Xero’s Small Business Insights page, but that still leaves nearly half of the UK’s SMBs struggling to make their cash work for them effectively.

To combat this, it’s vital to get in control of your cash flow and set solid foundations for your financial model – giving you the stability and confidence to invest money back into the company and provide the funds for expanding and growing the business.

We’ve highlighted 5 simple steps that will help you get proactive about your cash flow, with hints and tips for achieving positive cash flow throughout the business cycle.

1. Manage your finances in real time with online accounting

Cash flow is all about maintaining a positive balance between your cash inflows (money coming into the company) and cash outflows (the money going out of the business).

As such, cash flow is a process, not a static number. So to stay on top of cash flow, it’s vital that you have a view of your cash and working capital that’s as current and up to date as possible.

Managing your finances with Xero online accounting software brings you some of the key financial numbers you need – all shown as real-time information. Looking at your main Xero Dashboard brings you the critical financial information and key performance indicators (KPIs) relating to your financial position – helping you manage the twists and turns of the cash pipeline.

And there’s a wide range of plug-in Xero cash-flow apps, such as Float or Fluidly, that take your real-time Xero numbers and provide a full drilled-down cash-flow management tool.

Get to grips with Xero and:

  • Manage your outstanding bills – instantly see what bills need paying, when they are due for payment and the overall costs you must cover this month.
  • Review your outstanding invoices – see which invoices are due to be paid during the month (and the total income to expect in the bank) and plan your spending around this projected cash inflow into the business.
  • Compare cash in against cash out – the Xero Dashboard has a handy overview of cash in and cash out for each month, set out chronologically. Keep an eye on this metric, and use the ‘Statement of Cash Flows’ report to get a breakdown of cash.
  • Integrate with a Xero cash-flow appXero’s open API allows you to connect a huge range of reporting and cash-flow solutions, giving you smart ways to review, track and forecast your cash position in a highly proactive way.

2. Make it easy to get paid on time

37% of UK SMBs have experienced the negative impact of late payment on their overall financial health. The longer it takes your customers to pay, the less ready cash you have in the business and the harder it becomes to cover your costs and trade successfully.

Changing to a more efficient payment method speeds up payment times. By removing the barriers and making payment as simple as possible, your customers can often pay you with a simple click of a button – and that’s good news for your cash flow!

To get paid quicker:

  • Use Xero’s online invoicing – Xero’s invoicing features let you email electronic invoices straight to the client, getting your bills in front of the right point of contact fast. Customers can quickly preview the invoice on line and pass it for payment.
  • Move to online payment gateways – To speed up payment further, you can automate your cash collection by using GoCardless to take Direct Debit payments, or use PayPal as one of your payment options. You can even add payment buttons to your online invoices, adding further convenience for your customers (and speeding up the time it takes to receive their funds).
  • Take easy card payments – if you’re a consumer-facing business, or want to take payments from your retail outlet, card payments make a lot of sense. Having one of the new breed of card readers – such as iZettle or Square – lets customer pay you in a second with one tap, getting you that cash fast and improving cash flow.

There’s more information on payment technology here

3. Get proactive with debtor tracking

Figures show the average SMB is owed £63,881 in late payments, and that level of aged debt will have a hugely negative impact on the overall cash position of the business.

The bigger your debtor day number (the time it takes the average customer to pay you) the longer it will take to get paid and the harder it will be to maintain a steady and reliable pipeline of income into the business. So clawing back your outstanding payments, and getting that cash back in the kitty, is vital to good cash-flow management.

To reduce those outstanding debts:

  • Be proactive about debtor trackingrun your ‘Aged Receivables’ report in Xero on a regular basis and see which invoices are outstanding, and which clients owe money. This allows you to prioritise the most important debts to chase and gives you transparency around the size of your aged debts.
  • Make your credit control policy clear – get your invoice terms, penalties for late payment and formal credit control processes down in writing, and include this policy in all your contracts and customer proposals.
  • Automate your credit control function – chasing late payment takes time, so let the technology do some of the heavy lifting. Chaser is a Xero integrated credit control app that will automatically send out chaser emails to late-paying customers as soon as the invoice due date is reached.

Good debtor tracking and credit control helps to speed up those late payments – reducing your aged debt and giving your overall operating cash flow a healthy boost.

There’s more on automated debtor tracking with Chaser here

4. Understand your financial model and working capital

Financial modelling is an important way to understand cash flow. The efficiency of your financial model is directly linked to how effectively you can manage your cash flow. So the deeper you can drill into your financial model, the more control you have over cash.

When you understand the drivers in your business – areas like operating costs, staff expenses and forecasted sales – you increase your ability to manage your cash position successfully.

To get financial modelling working for you:

  • Understand your financial processes – build up a clear model of the main drivers in your business and set this up in a spreadsheet or create a detailed financial model in software using solutions like Modano or Quantrix. This forms a workable historic and forecasting model for your cash-flow management.
  • Refine the way you use your working capital – review your cash outflows and look for areas where you can make meaningful cost savings. Plug these potential savings into your financial model and immediately see the possible positive impact.
  • Use financial modelling techniques to plan ahead – modelling allows you to look ahead at your future cash position. This helps you to plan when (or when not) to spend money in the business, understand your business cash-flows and get the insights you need for scenario-planning, decision-making and providing information to investors.

5. Work closely with your accountant or business adviser

Cash flow can get complex – especially when it comes to running three-way cash-flow forecasts or running cash projections as part of a financial modelling process. That’s why there’s real value in working closely with your accountant when it come to cash-flow management.

Partnering with an experienced business adviser adds real value, bringing you a more detailed and forward-looking view of your cash flow. That’s vitally important when it comes to managing your cash effectively and sidestepping any shortfalls.

To improve your overall view of your cash position:

  • Include cash-flow KPIs in management accounts – tracking and measuring your cash should be central to your monthly reporting and management accounts. Work with your accountant to build these metrics and KPIs into your numbers.
  • Discuss cost savings and efficiencies – agree on clear targets for costs reductions and income boosts, and collaborate with your accountant to get your financial model firing on all cylinders.
  • Get the support you need to make big decisions – having a trusted partner to talk through those big financial decisions is critical. With a part-time FD on the team, you have the confidence needed to act on your strategic plans and improve cash in the process.

The financial road can be a rocky one, but with an trusted adviser in the co-driver’s seat you can stick to the most sensible route and keep your cash flowing effectively.

Get proactive and keep your cash flow positive

Cash flow isn’t something that will take care of itself – to maintain positive cash flow requires planning, proactive action and a keen eye on your financial numbers.

When you follow these 5 key steps, a lot of that hard work will be reduced:

  1. Manage your finances in real time with online accounting
  2. Make it easy to get paid on time
  3. Get proactive with debtor tracking
  4. Understand your financial model and working capital
  5. Work closely with your accountant or adviser

With solid financial foundations and processes in place, there’s no reason why your business can’t enjoy long-term positive cash flow, with the ready cash needed to fund your growth and expansion plans.

Who are FD Works?

Established in 2013, we’re a firm of accountants, business advisors and Xero specialists based in Bristol and Bath. We help those we work with identify the drivers for growth and empower business owners to make bold decisions.

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