Cash Flow will be imperative as we exit lockdown and start to rebuild.

I recently conducted a poll on LinkedIn asking about people’s attitudes to returning to work and opening businesses up again. The options were:

“Yes! Let’s crack on”

“Easy does it – baby steps”

“I’m going to wait and see”

“I’m doing as I’m told.”

The overwhelming majority of respondents (78%) opted for Yes! Let’s crack on. Whilst this is great to see, we also have to be careful in how we approach this. Chasing turnover can lead to disaster, and we have to ensure that as business owners we are re-growing our businesses in a controlled and sensible manner. Turnover is vanity, profit is sanity.

Helping us to achieve this will be closely monitoring our cash flow. We all know that cash is king in a business, and all businesses run some kind of cash flow forecasts (if you’re not, you should start doing so). What we need to be doing now though is running these cash flows on a more regular basis. Identifying and dealing with cash flow dips quickly and effectively will be key to getting businesses moving again. Many businesses have been helped by the CBILS, BBL and other government schemes, but this cash will not last forever.

The road to recovery

As the road to recovery will probably not be a smooth one, how do we overcome the bumps that will inevitably come? One temptation might be to hoard cash for a rainy day. Whilst this is prudent, it could also affect a company’s ability to proactively grow and could stunt investment, especially at SME level. One way of hoarding cash is to stretch out supplier terms and delay repayment. However, if handled poorly, this can have a very harmful effect on supplier relations and cause more damage in the future. As suppliers recover, they will want to build their business around good clients who helped them, not those who caused them cash flow problems of their own.

Key to the recovery

Key to the recovery of businesses and the easing of cash flow pressure will likely be the Asset Based Lending (ABL) market. Availability of finance against new and existing plant and machinery, property backed loans and invoice finance should be explored by all businesses if they don’t have such relationships in place already. Trade finance can help companies meet the up-front costs of fulfilling order (manufacturing, shipping, import duty etc.). Longer term cash flow needs can be assisted with factoring and invoice discounting, enabling businesses to draw cash against invoices raised on credit terms. Selective Invoice Finance operates in a similar, but arguably more flexible way, allowing business owners to pick and choose invoices to raise cash against as and when they need to. Companies who operate mainly through card terminals can look at merchant cash advance facilities to smooth their cashflow.

Selective Invoice Finance and Trade Finance

Selective Invoice Finance and Trade Finance are probably lesser known to most SMEs, but used correctly can be a disciplined, dynamic and flexible solution to cash flow problems caused by success. Winning larger orders can often be a lifeline to businesses but can also put unexpected strain on cash flow. Deploying cash to fulfil these orders can mean other areas of the business are neglected causing damage in other ways.

Protecting cash flow by de-risking the threat of bad debt should also be considered. Credit insurance gives protection against bad debt and protracted periods of non-payment, whilst also giving invaluable information about your current and future customers.

As small businesses, we can recover from what for most has been a hugely damaging period. What we must ensure is that we recover in a controlled, sensible and low risk way as possible. This will look different for everyone, but the central pillar for all businesses will be keeping tight control of their cash flow.