Understanding and managing the ebbs and flows of finances is rarely the forte of an entrepreneur with big dreams, nor of an established business director. This is why so many hire finance professionals to help them along the way, and it is also why mastering cash flow has always been recognised as crucial for the growth and sustainability of an enterprise.
Among the most common cash flow hurdles faced by SMEs across the UK are irregular revenue streams, delayed receivables, and inexperienced traders underestimating the importance of a liquidity reserve. When these issues go unaddressed, businesses fail quickly. They are unable to react to market changes, and finances stagnate; however, this does not have to be the outcome in any case.
Moving forward, we will get a brief overview of some cash flow basics before exploring a number of effective strategies that business owners should be aware of if it is their intention to improve cash flow. We will also discuss the continued importance of emerging fintech solutions, with the aim of empowering SMEs with the knowledge and tools to master their cash flow.
Understanding Cash Flow Basics
By cash flow, we refer to the money coming in and out of the businesses during a given time. This is a representation of the net amount in both the form of cash and its equivalents- a factor crucial for SMEs. Good cash flow management is therefore paramount for a business so that it can be assured of covering the operational expenses such as salaries for the workforce or supplier payments, thus allowing an enterprise to respond quickly to opportunities opening up in the market or adversities that may arise.
One common misconception in business finance is conflating profitability with a positive cash flow, which are two different metrics. Profitability refers to the money made once revenues exceed expenses; cash flow involves the measurement of inflows and outflows of cash, which means a company can show profits on paper; however, it may face persistent cash flow issues if those profits are not easily accessible in liquid form. You will see why this distinction matters later, as profits do not always translate into the cash needed for a business’s day-to-day operations.
Effective Cash Flow Management Techniques
There are plenty of techniques that entrepreneurs or their finance advisors can use to manage a business’s cash flow, and while modern technology has brought a lot of automation to the accounting sector, there are still numerous basic principles that will always remain relevant, and should be adhered to:
Budgeting and Forecasting
One of the most critical roles that adequate cash flow plays is based upon the fact that accurate budgeting and forecasting play a significant role in this. The reason accuracy is so important is that, in forecasting, the business is attempting to predict future inflows, as well as outflows, in terms of cash. Without the inputs of these number-driven requirements and other supporting elements needed for the operations, the business will not be able to reliably predict whether it can meet its financial obligations or plan for investments.
Effective budgeting can also help SMEs anticipate cash shortages and, with that data, adjust their operations to ensure they don’t fall into a negative cash flow position. This might mean reallocating workforce hours or restricting costly services; regardless, being proactive in the situation means longer-term problems can be avoided, and growth can continue.
Tools and Software
Since the advent of open-source bookkeeping software in the banking sector, a multitude of Fintech tools have been developed to offer businesses and finance professionals ways to achieve cash flow mastery. Open Accounting and Banking applications like QuickBooks and Xero, as well as AI-driven fintech software like our very own Pulse, offer platforms that transform raw financial data into actionable insights that business owners can then use to improve their performance. We will cover this topic in more detail below!
Managing Payables
Strategically timing payments, regardless of where the cash is going, will help any business optimise its cash flow more effectively, as it will be fully aware of when and how much money is going to be available for other operations. If necessary, actions like negotiating payment terms with suppliers, delaying or changing outgoing payment dates, or communicating with creditors to ensure they are aware of your business plans will give you more control over your cash flow. Being on top of the inflows and outflows in this way can help avoid accruing penalties or interest and will also help build trust with clients.
Maintaining a Cash Reserve
Creating and maintaining a cash reserve is highly advisable for any business looking to remain resilient. It is basically a financial safety net that can cover gaps during periods of stagnant cash flow without needing to compromise on day-to-day operations. The importance of a cash reserve can be illustrated most starkly by the COVID-19 pandemic, where an enormous number of businesses simply did not have enough of a liquidity reserve to weather the emergency and were left with no choice but to close their doors for good.
Regular Cash Flow Reviews
To achieve cash flow mastery, modern enterprises cannot just perform an annual review of their statements and expect the rest of the year to be business as usual. Regular reviews allow companies and their financial advisors to keep an eye out for potential discrepancies. Consistent monitoring also helps recognise patterns in cash inflows and outflows, effectively empowering enterprises to make informed choices regarding cost-saving measures or investments and even potential growth opportunities that may otherwise have been missed.
By being thorough and incorporating the methods we have discussed, SMEs should be able to strengthen their financial resilience and position themselves for improved operational efficiency. Without investing time into cash flow management, entrepreneurs can quickly become vulnerable to risk and will struggle when cash flow starts to dry up. With continued innovations in the fintech sector, there are many more technological advantages that business owners can take advantage of to ensure their cash flow management is done as effectively as it can be.
Leveraging Technology to Enhance Cash Flow
We have only touched upon this, but the revolutions in fintech, with the higher adoption of Artificial Intelligence and Machine Learning in finance, have transformed the methods through which cash flow can be managed by businesses.
Fintech Solutions
Fintech solutions provide the tools for accountants and entrepreneurs to manage their cash flow more accurately and efficiently. These digital tools will typically encompass a range of uses, from sophisticated accounting software which aids with accounting operations like invoicing and bookkeeping to open banking apps that allow recognised third parties to access financial data. There are also fintech platforms like Pulse, which integrate with both Open Accounting and Open Banking software to aggregate data from either or both sources and produce precious financial insights for its users.
Integration with Banking
The integration of financial management software with banking operations enables businesses to synchronise their transactional data from bank accounts directly to financial dashboards. Pulse, for example, aggregates banking data and presents it to SME owners or their financial advisors in easy-to-grasp formats. This helps all users involved gain a comprehensive view of their economic status, but more importantly, in a visual way that can be grasped. This seamless connection also eliminates the delays and errors associated with manual data entry, providing an up-to-date overview of available funds.
The capabilities of fintech tools are constantly evolving and improving, and by embracing them and choosing the right software, business leaders can greatly enhance their cash management practices. Not only will their financial procedures be streamlined, but from the financial insights that these tools produce, they can gain a much-needed competitive advantage in their market.
Parting Thoughts
Mastering cash flow management has always been important for businesses of all sizes, particularly for startups and SMEs, where achieving profitability and maintaining financial stability can quickly spell the difference between success and closure. The strategies we have discussed today are common practice and recognised as vital for establishing a solid financial foundation from which opportunities can be capitalised upon and troubles weathered. It seems that the future of business finances will further involve the integration of advanced fintech solutions, and automation, along with the accuracy of AI, will redefine how cash flow management is approached — for as long as human analysts last, that is!
Try Pulse for Cash Flow Mastery
Pulse excels in presenting financial data to different audiences. Our fintech tool’s advanced algorithms excel at aggregating financial data from Open Banking and Open Accounting software and then delivering it via an intuitive dashboard. An enterprise’s profit and loss, turnover, margin, and liquidity metrics are each presented through simple graphs and charts for the user’s benefit, where complex numbers are broken down into digestible insights. Contact our team and try our free demo today. See how our innovative financial software can start benefiting you!
