05/12/24
Almost every sector in the business world has a slump in revenue in the New Year.
In many ways this is completely unavoidable; the holiday season sends everyone into a flurry of spending all their hard-earned money on presents for loved ones (and sometimes themselves!) to celebrate Christmas and other winter festivities. But this often leaves people with little in the way of expendable income by the time the New Year rolls around.
This spending slump sees many businesses experiencing cashflow issues at the start of the year. With this guide, you’ll be able to weather this time of restricted spending, preparing your business for the months when your revenue is hit by a downward economic trend.
A healthy cashflow for your business means paying employees, rent, and taxes and still having money left over to re-invest in the business or enjoy the profits. Managing your cashflow well is essential for every business, big and small.
Let’s have a look at ways to improve your cashflow and glide through tough times without breaking a sweat!
What is cashflow management?
The aim with your cashflow should be to create a consistency in the amount of money coming into your business. The management of your cashflow encompasses all the money coming in and all the money going out, of your business.
With good cashflow management you will develop a positive cashflow, meaning that more money will be coming into your business than going out. Simple.
Good cashflow starts with keeping efficient records of payments, bank statements, and bills. By keeping an eye on all the money flowing through your business, you stand a much better chance of withstanding periods when revenue flow is disrupted due to events outside of your control.
However, if you don’t have adequate cashflow management, even a small dip in income could send your business to the brink.
What causes cashflow issues?
Late payments from customers – It’s quite common for a business to receive irregular payments from its customers. Problems occur when these late payments become so unpredictable that it disrupts the cashflow coming into your business.
The danger is that you have already expended time, effort, and money in delivering a product or service but you haven’t been able to recoup those expenses; this leaves a hole in your finances, and if it starts to happen often, it eventually threatens to unbalance your income completely if not addressed.
Excessive inventory – Be wary not to tie up significant portions of your income in stock that becomes stagnant. By investing a large amount of your revenue in inventory, you risk having that stock not generate you any income if demand drops.
You can combat this by performing a cash flow forecast giving you the ability to gauge demand for your product. You could also decide to switch to just-in-time inventory, which is where you only supply products as they are ordered instead of building up a large stock.
Unrealistic growth – Experiencing growth as a business is great, but when that growth happens too quickly, you could find yourself struggling to keep up with the new demand for your service or product. This could then lead to budgets being stretched beyond capacity and your business suffering as a result.
If you begin to experience a period of high growth, consider slowing things down by creating a financial plan that still enables you to grow, but in a more manageable way. Preparing your business for these periods will ensure cash flow remains stable and doesn’t become unpredictable.
Inadequate bookkeeping – Keeping accurate records is essential for the smooth running of any business. Bookkeeping is one of the fundamental aspects of maintaining healthy business practices.
Without precise records, the true income and outgoings of your business are obscured, leading to mismanagement of finances that could potentially ruin your company. Opting to use one of the many accounting software programs available makes record keeping much easier.
Excessive debt – A business loan can help you get on your feet when you’re starting out. It can be easy to fall into the trap of using loans to buoy your business to get through the difficult first year, follow a growth opportunity, or ensure your business withstands a rough patch. The problem occurs when you indulge in an over-reliance on debt to help you out, reasoning that you can simply deal with it later.
Needing a business loan is sometimes unavoidable; try to keep on top of repayments and not leave dealing with them to an unknown time down the road, in the case of high-interest loans this will cost you much more in the long-term.
What happens if you maintain poor cashflow management?
Delayed supplier payments – Having insufficient funds to pay suppliers is a sure way to damage professional relationships and your reputation – something your business will need if it is to survive.
Increased debt – Inability to pay your loans on time and deal with your debts negatively impacts your credit score and the rates you could be offered for any future business loans. If not dealt with, this could eventually lead to insolvency.
Reduced employee morale – Inadequate funds can lead to redundancy in an effort to salvage your business. This has the knock-on effect of needing your current employees to do more with less, and also leaving them with the knowledge that the business is in a precarious state.
Inability to buy new inventory – It goes without saying that if your business is dependent on providing products, you’ll need capital to be able to buy in new stock to sell. Mismanaged finances could leave you unable to fulfil orders, damaging your reputation and putting your business further in the red.
Loss of contracts – Without the ability to meet customer orders or provide a high-quality service, you could risk losing out on contracts for ongoing business. Being unable to pay suppliers or missing payments is detrimental for any business; losing a contract is hard to recover from, especially for a small business.
5 steps to better cashflow management
It’s not all doom and gloom, luckily there are many things you can do to improve your cashflow management.
Our top 5 tips are:
- Cashflow forecast
A cashflow projection gives you the ability to see potential problems before they occur. It will act as a guide, but it should be noted that it isn’t something that is 100% accurate, it is just a forecast after all.
Even so, these help you to make more informed decisions about your business and you can also create different forecasts based on different scenarios (a reduction or growth in sales for instance), so you can better price your products and services as needed to prepare for seasonal variation and economic trends.
- Diversify revenue streams
Basically, finding new ways to bring money into the business or ways to further streamline your existing expenses. This could take the form of checking different suppliers to ensure you have the best cost to buy in your products.
You can also look at expanding your offering, finding products and services that compliment your existing brand. To coin a phrase, you don’t want to have all your eggs in one basket, not if you can help it; if one aspect of your business suffers due to economic or seasonal reasons, a wider array of choices ensures you aren’t so dependent on that one resource for income.
- Identify expenses
This is a good way to see at a glance, your main outgoings. You are then in a much better position to project your incomings and outgoings for the next 6 or 12 months.
Expenses can include:
- Supplier costs
- Operating costs (rent, bills)
- Salaries
- Reinvestment in business
- Interest payments
- Loan payments
- Build a cash reserve
Easier said than done, but with a reserve of cash, you will be able to handle times of decreased income without too much worry.
This can have its downside in that you may gain a false sense of security in your ability to get through this time and not take into account the length of the low-revenue period. When you have periods of sustained profit, you can build a cash reserve by saving these profits rather than spending them or reinvesting in the business.
- Simplify your accounting process
If cash management is not your forte, don’t be afraid to outsource your financial accounting to a professional. Using an accountant removes almost all of the work for you in terms of keeping on top of your finances.
It’s still a good idea to be aware of everything we have discussed in this article, the business is yours after all, and you want it to do well, but the day-to-day running of a business takes up a huge amount of time and energy and your cashflow management is not something to leave as an afterthought.
How can personalised business support benefit you?
Cashflow management is fundamental for the success and sustainability for any business. Consulting with an accountant gives you the best financial options, and by working with them, they can supply solutions that are tailored specifically to your business needs.
The tips here are only a few of the things you can do to improve your cashflow management. CTT Accountancy’s professional business support offers a complete accountancy service, primed to take the work out of your cashflow management. Get in contact with us today to discuss your accounting needs.
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