Cash flow concerns can quickly become one of the biggest pressures facing business owners. Even profitable businesses can experience difficulties if cash is tied up in unpaid invoices, stock, or unfavourable payment terms. How do you find the right balance for working capital optimisation to get things back on track? What tools are out there to support businesses?
Understanding the early warning signs, taking a proactive approach to working capital, and using the right tools can help businesses protect their cash position and make better-informed decisions.
The warning signs of poor cash flow
Cash flow challenges often build gradually, so it is important to recognise the signs early. Some of the key warning signs include:
Struggling to meet payroll and tax commitments
Extending credit terms with suppliers
Using personal funds to support shrinking cash balances
Increasing reliance on credit for everyday expenditure
Growing debtor days
If one or more of these signs are present, it may be time to review your working capital position and consider what action can be taken to improve cash flow.
Working capital optimisation
Working capital optimisation is a careful balancing act. Businesses need to maximise available cash by reducing debtor and inventory days, while also negotiating appropriate payment terms with suppliers. This must be done alongside the many day-to-day priorities that demand management time.
A structured approach can help identify where cash is being held within the business and where practical improvements can be made.
Minimising debtor days
In an increasingly digital environment, cloud accounting and payment technology can make it much easier for customers to pay invoices promptly. Adding “pay now” options to invoices, for example, allows customers to transfer funds quickly and with minimal friction.
Businesses should also monitor debtor days and aged debt regularly, apply clear terms and conditions, and ensure appropriate credit checks are completed before offering credit.
Where commercially viable, quick payment discounts can also be used as an incentive for customers to pay sooner. This approach may be particularly useful at certain points in the year when cash flow pressures are expected.
Minimising inventory days
Stock can be a significant drain on cash if it is not managed effectively. Slow-moving or obsolete stock ties up funds that could otherwise be used elsewhere in the business.
Regularly reviewing inventory levels can help identify dead stock and opportunities to convert stock back into cash. Businesses should also consider the wider impact of holding stock, including storage costs, which can further reduce available cash reserves.
Maximising supplier terms
The supply chain is fundamental to business performance, but supplier terms should still be reviewed regularly. There may be opportunities to negotiate more favourable terms that support cash flow while maintaining strong supplier relationships.
The key is to find arrangements that work for both parties and provide the business with greater flexibility over when cash leaves the bank.
What else can support better cash flow management?
Software and digital tools
The right software will depend on the needs and complexity of the business. However, many accounting platforms now include features that can help digitise the invoicing process, automate customer follow-ups, and provide reporting on the value and age of outstanding debts.
Business owners should speak to their accountant about the tools available and how these can be used to create a clearer, more timely view of cash flow.
Cash flow forecasting
Cash flow forecasting is an essential tool for tracking and managing cash reserves. A 13-week cash flow forecast, reviewed on a weekly basis, can help businesses make informed decisions about upcoming payments, expected receipts, and potential funding gaps.
This type of forecast can support decisions around which payments are non-negotiable, which may be deferred, and what funds need to be collected to maintain sufficient cash in the bank. It also helps keep debtor balances firmly in focus.
Borrowing
Cash flow forecasting can also help identify future periods where the business may face pressure. By spotting these periods in advance, businesses may have more time to explore funding options and secure more favourable rates and terms.
While the current economic climate has seen interest rates stabilise, with the potential for longer-term borrowing rates to fall, borrowing should still be carefully considered. Used appropriately, it can help finance short-term cash shortages and provide the business with greater resilience.
Monitoring your KPIs
Key performance indicators, or KPIs, can provide useful insight into cash management and working capital performance. Regular monitoring can help businesses identify trends, spot risks early, and take action before cash flow issues become more serious.
Current ratio
The current ratio is a measure of liquidity and assesses a company’s ability to meet its short-term obligations, meaning amounts due within one year. This should be positive, although what is considered “good” will vary depending on the industry.
Current assets / current liabilities
Debtor days
Debtor days measure the average number of days it takes for customers to pay the business.
Trade debtors / sales x 365
Creditor days
Creditor days measure the average number of days it takes for the business to pay its suppliers.
Trade creditors / purchases x 365
Stock days
Stock days measure the average number of days stock is held before it is sold.
Stock / purchases x 365
Stock turnover
Stock turnover measures the number of times a business has sold and replenished stock over a given period.
Purchases / stock
Working capital cycle
The working capital cycle measures the number of days it takes to complete the cycle from paying suppliers to receiving cash from a sale. Ideally, this should be as short as possible to ensure cash is returning to the business in a timely way and can be reinvested effectively.
Stock days + debtor days - creditor days
Cash burn rate
Cash burn rate measures how quickly a company uses its available cash over a specified period, typically monthly. If the burn rate is too high, the business may risk running out of cash. If it is too low, the business may be missing opportunities to invest in growth.
Total change in cash position / specified time period
Cash flow issues are easier to manage when they are identified early. By reviewing working capital, improving invoicing and collection processes, monitoring stock levels, and using cash flow forecasting, businesses can build a clearer picture of their financial position and take timely action.
For business owners, the objective is not only to respond to cash flow pressures, but to create a more resilient and better-informed approach to managing cash across the business.
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