How to avoid being one of the six out of ten companies that fail within five years

By Ade Potts, Managing Director, Experian SME

Only four in ten small businesses survive past five years. These five extra guidelines for managing cash flow represent a great way to avoid becoming one the six out of ten that fail at or before the five year mark.

1 Diversify your revenue streams

In other words, don’t put all your eggs in one basket. If you are too reliant on one specific client or revenue stream, then this causes a potential risk to your cash flow should that one client go out of business or your single revenue stream hit problems. By creating a number of revenue streams and working with a variety of clients you can spread your risk and any negative impact to your cash flow.

2 Make use of technology

An awful lot of the stress of managing your cash flow can be removed with technology. These days there is a huge range of accounting software and apps that make cash flow management simpler and more convenient. Making use of this software will not only save you time but allow you to manage your business finances from your laptop, tablet or phone. The software needn’t be pricey and will often make up for its cost in time saved (not to mention stress).

3 Maintain good business relationships

Relationship building plays a core role across all aspects of running a business and cash flow management is no different. There are a few key stakeholders to consider who can have a significant impact on your cash flow.

  • Your suppliers

Keeping on good terms with suppliers could allow you to negotiate more favourable terms for your own payments. Rather than paying over one month, perhaps you could spread the costs over three, ensuring your cash stays in your account a bit longer.

  • Your lenders

If times do get tough, then a healthy relationship with your bank and lenders will make it much easier to approach them for help whether that be in the form of a loan, reduced payments or extended terms. They will want to see that your records are up to date and that your credit history is good so make sure you check your business credit report regularly to avoid any nasty surprises.

  • Your clients

If you show that you’re willing to be flexible with your clients and can build a positive relationship with them then they will be more inclined to make your payments a priority. They’ll also be more inclined to work with you again.

4 Know the warning signs

If you’ve created a budget, set clear cash flow targets and stay on top of your reporting, then you’ll be well placed to spot any signs that your cash flow might be struggling. Here are some warning signs to watch out for.

  • Your business is making late or missed payments
  • Your unpaid invoices are mounting up
  • You have a negative cash flow
  • You’re missing discounts on accounts payable
  • You’re constantly having to juggle funds around to cover costs

5 Seek help before things go too far

Once you start to see the warning signs, it’s time to take action. Look at what you can do internally, in terms of cutting costs, tightening your credit control processes and diversifying your revenue streams. If that’s not enough, then don’t be tempted to bury your head in the sand. Stay in close contact with your bank, your accountant, your creditors and your customers to ensure that all the stakeholders that make a difference to your cash flow are covered.

Cash flow management checklists

As we’ve discussed, your cash flow is essentially measured by the amount of cash you have coming into your business versus the amount going out. It’s safe to say then, that the three key areas that determine whether you have a healthy cash flow are:

  • How much money you’re generating
  • How much money you’re actually being paid
  • How much you’re spending

Let’s focus then on what you can do to make improvements in each of these areas…

How to make more money

  • Diversify your revenue streams
  • Improve your existing products and services
  • Build client loyalty to encourage repeat business
  • Provide great customer service to encourage client advocacy
  • Extend your reach through marketing, advertising and PR
  • Look for opportunities to cross and upsell your products and services based on your clients’ buying habits
  • Rent out extra office space
  • Consider a loan
  • Crowdfunding
  • Increase your prices

How to prevent and deal with late payments

  • Make use of credit checks to reduce financial risk
  • Set expectations by communicating your payment terms clearly
  • Offer payment plans
  • Invoice promptly
  • Make payment easy
  • Automate late payment chasers
  • Consider offering incentives for early payment
  • Enforce penalties for late payment
  • Maintain a healthy relationship with your clients
  • Consider using a debt collection agency as a last resort

How to spend less

  • Be energy efficient
  • Negotiate better rates with suppliers
  • Reduce your office space
  • Reduce travel costs by making use of video conferencing where possible
  • Review marketing costs and cut inefficient channels
  • Manage your time efficiently
  • Make use of automation where appropriate
  • Avoid needless costs such as compensation, fines and charges with robust processes and staff training
  • Upgrade inefficient and out of date equipment and software
  • Regularly review and cut unnecessary spending

Find out more ways of managing cash flow here: