With inflation and interest rates surging, many small and medium-sized enterprise traders (SMEs) in the UK worry if they can keep their business up and running for the long haul. Price inflation has reached up to 9 per cent since April whilst the interest rate climbed up to a total of 1.25 per cent as recently announced by the Bank of England.
Many businesses are still recovering from the pandemic and yet, the Russian-Ukraine war and lockdown in China added even more pressure to the struggling entrepreneurs. Pressures on supply and increase of employee wage put on them a heavier weight.
One in six SMEs may never be able to recover from the pandemic alone. But there is always hope for businesses that are still trying to fight the increasing inflation rate. They can maximize government support and develop effective strategies to recover from the blows as much as possible.
It’s high time businesses audit their cash flow and implement solutions. A healthy cash flow is the lifeblood of businesses, wherein the net profit exceeds the operating expenses. Otherwise, negative cash flow happens, which can be very detrimental to the business’ financial health.
One of the most effective ways to deal with the rising inflation rate is to identify what causes cash flow problems and provide solutions from there. Aside from the unexpected international crises, other reasons for a bad cash flow range from late invoice payments, abrupt growth, excess inventory, to general overspending, all of which can be fixed through wise cash flow management.
The goal is to maintain a healthy cash flow. Here are ways to do that:
Make Cash Flow Forecast a Habit
This is the first step to determining whether a business can still keep it up or is heading into a cash crunch. A cash flow forecasting can be as simple as determining the money the business expects to receive (inflow) and the amount it has to spend on expenses (outflow) through receipts and payments.
Updating the books regularly is crucial for the accuracy and fluidity of cash flow. A weekly forecast can lead to at least another 13-week prediction, enabling the business to recognize any fund shortages in the future. Long-term forecasts lead to better decisions and prevention of cash flow problems.
Reduce Unnecessary Expenses
Some expenses turn out to be unnecessary in the long run. Entrepreneurs should sit down and take the time to reconsider which of the current costs they can do without. Take, for example, extra hires in a traditional brick-and-mortar store. There may be staff members who merely just have to wait by the door and watch customers pass.
There are possibly many more unnecessary expenses that businesses need to point out and cut off. Look into other areas, such as rarely used expensive software packages or a massive office space that could actually be downsized otherwise.
Ensure Payments Are Delivered Promptly
Businesses can reduce payment delays in various ways. They can issue invoices immediately, improve payment methods and frequency, and enforce a rigid escalation process for late payments yet remain considerate for certain situations.
Invoice factoring is also worth considering, especially when the business needs cash immediately, as it usually cashes out within just twenty-four hours. Through invoice finance, unpaid invoices are sold to a factoring company that pays the business 80 to 90 per cent of the profit in turn.
Once everything’s settled, the factoring company deducts the company fee from the rest of the invoice amount. This is a great way for rapidly growing businesses to keep the money rolling, effectively filling in the gap for funds.
Improve Inventory Management
Cash flow can be tied up with excess stock. When orders decrease in number, these inventories may just sit in the warehouse and hinder the cash flow. Businesses should first see to it if a certain product is worthy of being bought in bulk. They must ensure whether or not the product will lose value over time.
However, it would be better if they stocked goods just in time, not in bulk too early. This can greatly free up more cash to circulate actively in many other areas of the business.
Inventory can get complicated, being one of the reasons why accounting is challenging, especially when product returns get into the picture. Experienced bookkeepers or accountants can greatly help with improving all aspects of inventory management.
Take Care of Bad Debts
Not only should businesses take care of late payments but most especially bad debts. Too many debts that remain outstanding even after 90 days can be very detrimental to the business’s cash flow as over time, these kinds of debts get harder to collect, taking much of the business’ time and resources in the process.
One way to solve this is to seek help from a debt collector agency. They can take the invoice and debt collection responsibilities off the businesses more efficiently. Sometimes, pressure from a third party is all it takes for the customer to comply with the payments. People tend to pay faster with a debt collector in the middle.
Customers Pay More Quickly with Debt Collectors
But to prevent bad debts, businesses must make credit checks a prerequisite so they can identify beforehand if a customer is a good payer or not. Through these evaluations, businesses can make the best decisions regarding the duration of terms and many other offers.
Have a Good Credit Score
A good credit rating is one way to get funds, especially when the business considers lending for more capital. There is no shortcut to getting a good rate, only paying debts, bills, and invoices on time. Businesses have to check through their credit details as well for any mistakes as any slightest error can affect their credit history.
However, this doesn’t mean funding providers only concentrate on credit scores. Others, such as factoring, may just refer to the business plan, outstanding invoices, or debtors. But this nevertheless doesn’t mean businesses don’t make efforts to obtain good credit ratings.
Seek Support from Experts
Startup businesses especially need support from experts for proper execution right from the start. Cash flow management can be a complicated matter. It’s not just all about counting the profits.
Businesses need to consider other bills in many forms. Accounting remains crucial to getting the finances on the right track.
For this, businesses can greatly benefit from the help of experts regarding their accounting, taxation, and financial issues, especially during these days’ crises. Fortunately, Legend Financial has a lot of advisors based in the UK that can provide all these in a package at an affordable price.