3 Cash Flow Management Strategies for SMEs

For a lot of business leaders, managing cash flow can be a bit of an intellectual challenge, more so than growth (the more sales you make, the higher your revenue) and profit (the lower your costs, the higher your margins).

Whilst ensuring you always have enough cash in the bank can be a hard nut to crack, crack it you must. Sadly, one of the biggest reasons why companies fail is not because they are unprofitable or failing to make revenue, it is because they run out of cash.

A recent article by the FSB reported that more than half (54%) of small businesses surveyed had their cash flow woes compounded by the late payment of invoices. This reinforces the need to consider alternative strategies to ensure sufficient business cash flow – you simply cannot rely on the goodwill of your customers to pay on time and in full.

There are plenty of tactical tips and tricks to manage your cash position – in this blog we explore two data points that merit careful thought and a couple of strategies that, once implemented, should see a marked increase in working capital.

How much are you spending to acquire a customer?

Do you know how much it costs you to get a customer to make that first order? This is important because it will enable you to predict at what point that customer becomes profitable. As all acquisition costs are upfront costs, when you are building your plan to acquire X customers, you’ll need the equivalent of X multiplied by the cost of each acquisition already in the bank (or about to come into the bank) in order to do so.

There’s little point executing a customer acquisition campaign when you don’t have the cash to afford it, and even less point spending so much on acquiring a customer that it takes ages for them to become profitable (in this instance you are simply buying revenue).

Do you understand your Unit Economics?

It sounds really simple but it’s another critical point: getting your pricing right, such that you make an acceptable margin on every transaction is at the heart of every profitable business. The better the margin for each transaction, the sooner that customer becomes profitable (and the more you might be willing to invest in acquiring those valuable customers).

Having a grip of your Cost Per Acquisition (CPA) and Unit Economics (UE) gives you the ability to create far more sophisticated growth plans than ‘just’ having a marketing budget, some sales staff and hoping that it all comes good in the end (and maybe it will, but it’s not the most efficient way to run a company!).

Key cash flow management strategies

1. Build a cash flow model

There is plenty of software on the market that can help build sophisticated models, however, if you haven’t built one before, it’s always best to keep it simple. In addition to inputting when you expect invoices to be paid (rather than revenue at the point you raise the invoice),and your costs when you have to pay them, the other key elements to consider are when those less frequent payments need to be made such as corporation tax and VAT. Being aware of when they will be due and gradually building up the cash reserves to pay will have a transformational impact on your general levels of calmness and anxiety!

2. Keep a close eye on your receivables

Your trade receivables comprise those issued but as yet unpaid invoices on your balance sheet. Knowing when they are due and ensuring your customers pay on time is critical: it is the moment in time when that revenue turns into cash.The fact that you have issued the invoice in no way guarantees that you will be paid on time. Sadly, far too many customers will take advantage of a supplier’s good will by stretching the amount of time they take to pay their debts. Stay on top of them, hold them to the agreed payment terms!

3. Consider invoice finance

Invoice finance, done well, is an extremely powerful way to improve working capital without taking on additional debt. At its heart, invoice finance enables you to access the cash locked up in your issued but as yet unpaid invoices – your trade receivables – far more quickly than the agreed payment terms. Yes, you need to pay a fee to an invoice finance provider but receiving a percentage of the invoice in cash within a day or two of raising it will most likely be far more valuable to you than waiting 60 or even 120 days to be paid in full. Have a play around with your cash flow model to see just how quickly working capital increases if, say, 80% of your invoices are paid within 2 days – it should be a healthy number!

How Hydr’s invoice finance can improve your cash flow

At Hydr, we recognise that a lot of people are put off invoice finance by the perception that it takes too long to apply for, is more complex and cumbersome to manage than a loan and costs just as much. Our response is that it doesn’t have to be like this! Our proposition is paperless, quick to apply for, extremely easy to manage, through class leading software integration, and is fairly priced too.

We fund 100% of the value of your invoices for a fee that is fixed and fair, and we pay you the cash within 24 hours. We give decisions in real time and onboarding can take as little as 15 minutes. We don’t hold you to minimum use or term contracts – you can leave at any time. Also, there is no cost to having an active account on our platform – you simply pay fees on a per funded invoice basis, nothing more. Even better, fixed means just that: we don’t change our fees even if your debtor is a few days late in paying.

Finally, we take on the responsibility to manage credit collection of the invoices we have funded. We do this in a way that is thoughtful and professional, acting a bit like an extension of your finance function. By doing this, we not only help you improve your working capital, we save your time (and anxiety) too!

Why don’t you go back to your cash flow model and look at the transformational effect of receiving almost 100% of your invoice values within 24 hours of raising them. Think about all the possibilities that working capital presents!

If you’d like to learn more about how Hydr’s invoice finance can help you to improve your cash flow, learn more here, or contact us today.