Cash Flow For Beginners

Making a success of a new business boils down to the balance sheet, and getting more money in than you are paying out. This seems like a straightforward concept, but it can be difficult in the early days.

Boosting sales is vital and will lead to success, but something that is often overlooked by new firms is the opportunity to make savings, improving the bottom line. Cash flow issues are often the symptoms of something else being wrong, such as the timing of invoices being paid. However, not all causes of cash flow difficulties are external! it’s important to take an occasional step back and look for areas where you can make efficiency gains internally or cut unnecessary spending. There are a host of ways you can save money as a SME, and sometimes all it takes is a little time to sit down and analyse your outgoings.

So where to start?

Indirect Costs

This is one of the easiest areas in which to cut spending. Because indirect costs are for things which don’t affect your end product, you can often change providers to get the best deal without too much disruption. Things like insurance, utility bills, banking charges and stationery are great examples – you can negotiate for a better price or switch provider. If you take lots of payments by credit or debit card, imagine the difference just 0.5% on each transaction could make – or a 20-30% saving on utilities or insurance? The longer you’ve been with a provider, the better position you’re in to renegotiate. Don’t be shy about it!


How much money do you have tied up in stock? Can any of it be released?

If you have slow moving inventory, consider discounting it to generate cash. If it’s very slow moving you might want to eliminate it from your inventory altogether. What about obsolete/out of date stock? Where this cannot be sold it’s worth looking into disposal, which will free up valuable storage space.

Talking of storage space, how much is that costing you? Could it be reduced, or partly used for something more lucrative, such as a sales counter to shift the slow moving stock mentioned above?

Raw Materials

This is mainly a manufacturing issue, but it can be expensive and detrimental to cash flow. You need to keep raw materials in stock in order to manufacture products, but that involves outlay that will not be recouped until the manufacturing process is complete and the finished product can be sold. Can you negotiate longer credit terms with your suppliers? It’s also a good idea to find local suppliers where possible (assuming this is also cost efficient, of course). If you know you can buy your raw materials locally, it reduces the need to keep so much in stock.

Overheads and Equipment

It is important to differentiate between overheads which are necessary and those which are not. Consider reviewing all discretionary payments to ensure they support the strategy of future development of the business. Notwithstanding the tax breaks for purchases of new equipment, you should have a fixed asset register and this should be reviewed and any items that are no longer required could be mothballed (stored but kept in good condition so that it can be used again in future) or even sold.

Your insurance policy should also be reviewed to ensure that you are not over or under insuring, particularly if you have made major changes to the amount of stock, raw materials and equipment held!


Software costs can be huge depending on your company’s needs. Many providers charge per licence, and some have monthly or annual fees. There is usually a cost benefit to buying annually instead of monthly; however, consider your use of the software. If you are only using it once or twice a year, it might actually be more cost effective to opt for the monthly subscription and only activate it in the months in which you will use it. Equally, with software purchased on a per licence basis – do you need a copy for every single computer? Consider how much money could be saved by cutting out even just one or two licences if not all staff are using it.

On the flip side of this, consider a software audit to make sure that every user who requires a licence has one! It’s very important to make sure that all software is legal and has the licence where required (e.g. some software is only free for non-commercial use). This is especially important if employees are able to install software on their workstations. Fines for unlicensed software use can be hefty!

External service providers

It’s worth reviewing what you pay to external service providers periodically, particularly those on fixed retainers. Do you still have the same requirement for their services that you did when you originally retained them? If your needs have increased, might it be cheaper to employ a member of staff? If your needs have decreased, you may want to renegotiate your contract with them or even terminate it.

Debtors and Creditors

Credit checks should be carried out before taking on any new customers; agree your business terms in writing before opening an account. Consider early settlement discounts for your customers and interest charges for late payment. If appropriate, clarify with your customers that you operate a credit control policy and make it plain what their credit limit is. You need to review your debtor lists regularly and set up a policy for chasing and dealing with late payers to minimise the impact on your cash flow.

On the other hand, your creditors will expect you to understand their terms of business to ensure that they fit in with yours. Have the confidence to renegotiate the terms, discounts for early payments and conditions of one-off contracts and, if necessary, agree extended payment terms.

For more about dealing with debtors and creditors see some of our other articles:

Human Resources

If your company is in a position where there is a need to reduce the workforce, there are alternatives to redundancy (a one-off cost with no benefits) such as part-time working, pay freezes or cuts and the removal of overtime. You could offer job share opportunities for employees who may wish to reduce their hours or flexible working options for working from home, with reduced pay.

It is important to make everyone aware of any cash management cost-control strategies; involve your employees by encouraging them to make suggestions for improvements. Stakeholder involvement is essential for employee morale.

Banking and Finance

If you have a loan or other finance, be aware of any covenants and limitations that are in place and that they are not breached. Make sure you keep up to date with payments to avoid any excess charges, and if there is a financial advantage to paying off a loan early and your company can afford it, it may be worth considering. Keep a note in your calendar of when overdraft and loan facilities will be reviewed. This will allow you sufficient time to negotiate with current or potential providers that may offer preferential rates.

It is easier to access finance when you don’t need it, so having a facility such as the Just Cashflow Revolving Cash Facility or the BusinessPlus Mastercard® in place for when you need that additional finance makes good business sense. As both work in a similar way to an overdraft, you only pay interest if and when you access the funds.

Obtain lists from your bank to ensure that there is no unnecessary expenditure being incurred for direct debits or standing orders. Many costs can be spread to improve cash flow – try looking at all your payments and see if there is an option that you can use to suit your business. There may be an interest charge, but this could still be less than you pay for your bank facilities.

Tax and VAT

If you need to delay paying your taxes, negotiate with HMRC sooner rather than later in order to avoid fines and late payment fees. Speak to your accountant to identify any schemes or reliefs available to your company – for example, there are VAT schemes which can help with cash flow.

For more information about the different VAT schemes see our article on this topic.

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