Managing your business’s cash flow: 23 tips to stay in the black!

The Covid-19 health crisis has led to a new realisation among business leaders, in both SMEs and multinationals. Indeed, according to an IFOP survey published in June 2020, 22% of those surveyed now believe that cash flow management must become a top priority for businesses. 

Where to start? What steps should you take? What pitfalls should you avoid? Here are 23 tips for managing your cash flow effectively so that you can finance your business’s growth under the best possible conditions.

#1 Drawing up a cash flow forecast

Managing cash flow is not a task that should be left until the last minute. It is therefore vital for business leaders to adopt a long-term perspective in order to anticipate any budgetary difficulties that may arise.

In fact, drawing up a projected cash flow plan will enable you to anticipate quiet periods well in advance, allowing you to make the right decisions ahead of time.

However, in addition to the seasonal nature of cash inflows, the projected cash flow plan will also include simulations of the potential impact of any exceptional costs and deficits, in order to be prepared for any eventuality.

#2 Understanding the unique aspects of your business

A wide range of factors, both internal (business model, production chain, financing methods, etc.) and external (economic climate, competition, regulatory environment, etc.), can affect a company’s cash flow. It is therefore essential to have a clear understanding of your company’s various exposures in order to better manage its liquidity risk. 

Whilst certain negative events, such as a drop in turnover, can affect your cash flow, it is important to remember that positive events, such as sustained business growth, can also cause difficulties if they are not properly anticipated.

#3 Use the right management tools

There are two main categories of cash management tools currently used by businesses: spreadsheets and specialist software.

Managing your cash flow with Microsoft Excel

The most widely used solution to date among micro-enterprises and SMEs, the well-known Excel spreadsheet offers a wide range of features for tracking cash flow and producing financial forecasts.

However, whilst Excel allows you to carry out all sorts of operations and reporting, particularly thanks to its pivot tables, formulas and VBA macros, some users prefer to turn to solutions with a more refined user experience.

Use specialist cash flow management software

The visual and intuitive interface of cash management software makes it easier for users to understand the system, whilst also facilitating communication with colleagues and external partners (such as accountants, investors and lenders).

Real-time visualisation of cash flow positions, testing of various financial scenarios, automatic data synchronisation: this type of software offers decision-makers a 360° view of the company’s economic and financial outlook, whilst minimising the margin of uncertainty caused by human error.

Increasingly present in specialised cash management software, artificial intelligence also supports business leaders in their decision-making through a range of decision-support tools.

#4 Creating a monthly budget

In addition to a long-term view of the company’s cash flow, a shorter-term perspective offers greater flexibility. For this reason, modelling a budget that is updated monthly enables the setting of specific, measurable and time-bound targets.

The more accurately the monthly budget reflects the company’s actual situation, the easier it will be for decision-makers to assess the positive or negative impact of their decisions over a given period, and then to optimise or adjust their approach accordingly.

The monthly budget is therefore included in the projected cash flow plan as part of the tools used to communicate with partners and staff, so that everyone can easily understand the ins and outs of every inflow and outflow of funds.

Receipts	Payments
Turnover (including VAT)	Purchases (including VAT)
Grants & Capital Contributions	Investments & Capital Reductions
Customer payments	Salaries & Social Security Contributions
Financial products	Other administrative expenses
Tax refunds	Taxation & Taxes

#5 Establish a comprehensive management framework

There are several tools available for managing a company’s cash flow at all levels. Let’s start with the broadest overview and work down to the most detailed:

• The projected cash flow plan. It provides a long-term overview of the company’s development objectives and the constraints to be anticipated.

• The Cash Flow Statement. It provides a more visual overview of the cash flows involved in the Forecast Plan.

• The Funding Plan. It provides an overview of the cost structure (and how it will be funded) for a specific project.

• The Cash Flow Statement. It provides a more visual overview of the sources of funding (and their timing) for a given project.

• The Monthly Budget. It provides an overview of income and expenditure on a month-by-month basis.

#6 Delegating cash flow management

Because cash flow management is a task that should not be taken lightly, it is essential to give it your full attention on a regular basis. Unfortunately, a manager’s schedule is often overloaded, and even the slightest distraction can lead to a detrimental loss of efficiency.

Good to know: A Harvard study published in August 2018 shows that 36% of a CEO’s time is spent dealing with urgent and unexpected tasks.

In such circumstances, the best solution still seems to be to delegate cash flow management to a designated treasurer in larger organisations, or even to a trusted member of staff in smaller ones. In the latter case, however, care must be taken to ensure that their schedule and day-to-day tasks are not, in turn, disrupted by cash flow management.

Please note: Despite this, it is still the manager’s responsibility to regularly monitor their employee’s performance.

#7 Carry out a detailed analysis of your financial statements

Effective cash flow management inevitably requires a detailed understanding of the nature of a company’s cash flows, assets and liabilities – which is precisely the role of corporate accounting!

Where this is not managed in-house, it is essential for the business owner to be supported by a good chartered accountant in order to easily identify the main areas of expenditure and better prioritise financial objectives. More than just a specialist, the chartered accountant must therefore be able to explain things clearly enough to give the business owner a clear and up-to-date picture of their cash flow situation.

#8 Identify the main sources of waste

One of the keys to effective cash management lies in identifying and minimising unnecessary outflows of capital.

In fact, there are often several areas where expenditure can be cut, for example:

• Paper consumption and printing costs. Electronic document management not only helps to save money, but also makes it easier to access documents.

• Energy wastage (lighting, electronic devices, gas). Raising staff awareness of these issues – both financial and environmental – remains the best way to minimise costs that add up slowly but surely!

#9 Raising awareness among staff

Communication with staff within the organisation must be as transparent as possible. Only in this way will everyone be better able to understand the reasoning behind the priorities set by senior management, the finance department and the treasury.

Sharing key performance indicators, assessing the company’s current and future economic situation, and communicating about the main areas of expenditure are all best practices for ensuring that your decisions are well-informed.

Because relying solely on disciplinary measures to ensure compliance with your decisions is simply counterproductive, the priority is instead to build and maintain a genuine relationship of trust so that you can discuss your concerns and those of your staff.
Please note: This approach to raising awareness involves regular staff training as well as the application of these principles to real-life situations.

#10 Prioritise variable costs

The two main sources of costs can be divided into variable and fixed costs. The problem with fixed costs is that they are entirely independent of the company’s performance.
To better cope with quiet periods, when this approach does not result in higher costs, the ideal solution is therefore to convert as many of your fixed costs as possible into variable costs.

#11 Offer more flexible remuneration

Wages and social security contributions often rise in line with the company’s growth, meaning that it can quickly become difficult to maintain the flexibility and financial leeway needed to weather difficult times.

Making use of bonuses and incentives, a 13th-month payment, or even temporary staff and freelancers helps managers navigate difficult periods without jeopardising their employees’ pay and, by extension, the long-term viability of their business.

#12 Ensure regular follow-up

Cash management is not a rigid discipline. On the contrary, it requires a degree of flexibility to deal with unforeseen events that may arise at any time of the year.

Unpaid invoices, late deliveries, stockpiling… Whilst optimism leads us to hope that everything will go to plan, let’s be realistic: that is rarely the case.

It is therefore sometimes necessary to postpone certain non-essential expenditure in order to maintain a healthy cash flow. Regular monitoring of cash flow makes it possible to identify unforeseen events early enough and manage them more effectively by prioritising areas of expenditure. Postponing certain purchases can therefore help keep the business afloat in the event of a setback.

#13 Anticipating quiet periods

Although unforeseen events are, by definition, unpredictable, it is nonetheless important to prepare for them as best as possible. To this end, long-term modelling of annual cash flows is a major asset in anticipating difficult periods during the year.

Fixed costs, seasonality, underlying trends… Managers need to be aware of the key factors affecting cash flow, and they need to be aware of them well in advance.

As a result, the main areas of concern in cash flow management can be identified in advance and resolved more easily: for example, adapting your business model or raising capital could provide the company with greater financial breathing space should the need arise.

#14 Negotiating with your bank

Even with the best will in the world, there are times when it feels as though the sky is falling in on you. To avoid a cash crunch, it’s sometimes best to prepare for the worst and arrange an overdraft facility with your bank.

However, as trust is obviously key to securing favourable terms, it is best to make this request during a period of strong growth for your company.

This way, you’ll benefit from better rates and a higher credit limit, and you’ll be better equipped to deal with crises, provided they remain short-lived and exceptional.

#15 Building up a financial safety net

Applying for an overdraft is never a straightforward process, which is why it’s always a good idea to set aside a percentage of your profits so that you can remain self-sufficient when faced with the ups and downs of running a business.

Building up a safety net over time will, for example, help you smooth out your cash flow and cope more easily with the worst-case scenarios (natural disasters, burglaries, economic crises, etc.). This approach will make it easier to navigate the cycle of expansion and consolidation.

#16 Understanding Working Capital Requirements

The other side of cash flow management is not about cutting costs, but rather about maximising your profits. Although this concept may at first glance seem “easier said than done”, bear in mind that cash flow is calculated using the following formula:

Cash flow = Working capital – Working capital requirement

However, working capital – that is to say, resources that are available on a sustainable basis – derives directly from all possible sources of liquidity.

#17 Increasing turnover

As a business owner, it’s all too easy to get bogged down in a thousand different goals and, by constantly having your nose to the grindstone, to lose sight of some of the fundamental principles underpinning a company’s profitability.

This is particularly true of the Pareto principle (also known as the 80/20 rule), which states that 20% of your customers will account for 80% of your turnover. Although this statistical law should not necessarily be applied to the letter in business management, it may be wise to take a step back and review the state of your customer portfolio.

You may then be shocked to realise that the bulk of your human, time and financial resources is being spent on chasing up late payers, negotiating with demanding customers or dealing with small orders.

Depending on how scarce your offering is (and therefore how intense the competition is), you can plan a slow but gradual increase in your pricing whilst focusing your efforts on retaining your most profitable customers. Promotion, advice and availability are therefore key to achieving your goals.

More broadly speaking, your market research should result in a clear and precise definition of your typical customer. This will make it easier to target your audience effectively using the most appropriate communication channels.

Whether it’s digital communication (social media, white papers, newsletters, blogs, etc.), print advertising (flyers, banners, etc.) or participation in trade fairs and conferences, it is essential to carry out a detailed analysis of the return on investment (ROI) of your initiatives in order to optimise your profitability.

Depending on the product or service being sold, it may be more effective to focus on regular push communications (reaching out to your audience) or pull communications (drawing the audience to you), always with the aim of providing genuine added value. For example,

running promotional offers to attract customers during quiet periods is one of the best practices used to manage seasonal fluctuations in revenue.

#18 Analyse and innovate

Regularly re-evaluating your business model enables you to innovate not only in terms of your product range, but also across your entire production chain.

There are several possible sources of inspiration behind such re-evaluations, namely:

• competitive intelligence to stay ahead of the game;
• market analysis to stay in touch with your target audience;
• customer feedback to improve your satisfaction rate;
• employee feedback to boost your productivity.

Good to know: Traditional methods such as customer satisfaction surveys and staff suggestion boxes remain an excellent way to gather constructive feedback!

#19 Keeping a balance

One of the common pitfalls for many entrepreneurs is to focus solely on turnover. Selling a lot is good, but the key is to maintain a substantial margin whilst securing a steady stream of orders.
Stable, reliable growth will always be better than a string of small, scattered orders, or even a single large, one-off order. The ideal approach is to maintain a balance in order to smooth out your cash flow.

What’s more, when some of your transactions are denominated in foreign currencies, it may be necessary to put a hedging strategy in place to protect yourself against currency risk and safeguard your profit margins.

#20 Managing customer payment terms

One of the main challenges of cash flow management is that you don’t always have all the information you need to optimise it, particularly when your customers delay their payments. Ensuring that your partners pay on time therefore requires prompt invoicing, clearly setting out specific payment deadlines. 

Please note: Payment terms exceeding one month should be reserved exclusively for your most loyal customers!
Whilst late payment penalties and formal notices remain an option, it is best to do everything possible to avoid having to resort to them: to this end, it is wise to establish a clear and systematic debt collection policy in order to waste as little time (and patience) as possible.

#21 Selecting the right clientele

To guard against the possibility of cash flow problems caused by unpaid bills, the best approach is to choose the right customers from the outset. Whilst not everyone can afford this luxury, as the business gradually matures, it will eventually be possible to make this selection.

To identify your “customer filters”, you first need to have a clear understanding of your offering, your values, and the people they are aimed at.

The more successful your business model is, the easier it will be to set the rules, for example:

• reduce the permitted payment terms;
• reduce the scope for negotiating rates;
• narrow down your range of products to focus solely on the most profitable ones.

#22 Encourage cash payments

Although setting entry barriers helps to avoid unpleasant surprises in your business partnerships, your invoicing policy should be complemented by incentives.

If you want to be paid promptly, you need to put the right measures in place: offer online payment, provide a range of payment methods, reward the most punctual customers with discounts… Any means is worth trying to encourage your partners to play an indirect part in keeping your cash flow healthy!

#23 Improving collaboration with suppliers

Expecting impeccable behaviour from one’s partners means, in return, that one must put one’s own house in order. Not only to protect one’s reputation, but also to secure more favourable terms, it is essential to maintain an open and frank dialogue with suppliers and to honour one’s commitments.

Good to know: Setting up reminders for specific dates and times in your digital calendar may help you avoid missing deadlines or late payments.

In addition to this diligence, it may be worth regularly renegotiating rates with your suppliers whilst analysing the competition, in order to strengthen your case…

For companies involved in international transactions, cash flow management can quickly become complicated due to exchange rate fluctuations. To help you manage your cash flow more effectively, b-sharpe makes it easy for you to pay your invoices in foreign currencies!