Understanding and managing the ebbs and flows of finances is rarely the forte of an entrepreneur with big dreams, nor that even of an established business director. It is why so many hire finance professionals to help them along the way, and 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 an aim to empower SMEs with the knowledge and tools to master their cash flow. 

Understanding Cash Flow Basics 

For businesses, cash flow at its most basic means the money coming in and going out during a specific time period. It represents the net amount of both cash and their equivalents, and for small and medium enterprises (SMEs), it is crucial. Having a well managed cash flow is essential for ensuring that a business can cover its operational expenses such as workforce salaries or making supplier payments, and it allows enterprises to respond quickly to market opportunities or challenges. 

One common misconception in business finance is also 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 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 stuck to: 

Budgeting and Forecasting: 

We know that accurate budgeting and forecasting play one of the most important roles in maintaining effective cash flow management. Accuracy is so important because forecasting involves predicting future cash inflows and outflows, and without accurate number inputs, a business will not reliably be able to predict if 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. 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 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 which 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 out to, will help any business to optimise their cash flow more effectively as it means they 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, to delay or change outgoing payment dates, or communicating with creditors to ensure they are aware of your business plans, will give more control over your cash flow. Being on top of the inflows and outflows in this way can help avoid accruing penalties or interests, and will also help build trust with clients. 

Maintaining a Cash Reserve: 

Creating and upkeeping 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 stale 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-21 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 businesses 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 businesses 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 putting the time in to master cash flow management, entrepreneurs can quickly find themselves failing to mitigate risks, and will struggle if a time comes when cash flow starts to dry up. Thankfully, with the continued innovations being made in the fintech sector, there are many more technological advantages that business owners can take advantage of to ensure their cash flow management is as effective as possible. 

Leveraging Technology to Enhance Cash Flow 

We have already touched on it briefly, but the advancements in fintech, especially with the accelerated use of Artificial Intelligence (AI) and Machine Learning (ML) in the finance sector, have brought about irreplaceable methods through which businesses can manage their cash flow. 

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 highly valuable 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 financial status, but more importantly, in a visual way that can be grasped. This seamless connection also eliminates the delays and errors associated with data input, 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, 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, but 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, then presenting 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. Sign up to Pulse today, and see how our innovative financial software can start benefiting you!