A complete guide to managing small business finances

Financial management is essential for all businesses, whether big or small. It's difficult for businesses to succeed without this. There has been a large decrease in the number of businesses trading over the past few years.

For most of them the reason for their decline is not poor customer experience but simply poor cash flow. Many small businesses haven’t been able to survive the recent economic climate with consumer spending being unpredictable.

Those that have managed to continue trading, have done so through quick and responsive financial management.

This guide will cover the main topics of how you can manage your cash flow effectively and sources of finance.

Why is cash flow important for a small business?

All businesses need cash flow to succeed and if your cash flow is running low you will need to look for a cash flow injection. Effective cash flow management can help you analyse how healthy your cash flow is and look for ways to improve it.

Cash is vital for all businesses, it allows them to operate, meet financial obligations and invest. Without adequate cash flow your business is unlikely to succeed.

How does managing cash flow affect your companies future?

Managing cash flow is very important for any business. A clear understanding of your financial position allows you make to timely and accurate decisions when it comes to spending.

Being able to manage your resources effectively will make your business more resilient to change such as, unpredictable market conditions or fluctuations in income and expenses.

The aim of effective cash flow management is to make the most of what cash you have available.

All business owners need to plan for the future, whether this is to build up a cash pot, invest in new products or call upon cash reserves to hold out during lean times.

Find out how to improve cash flow here.

4 ways to manage cash flow

  • Accurate bookkeeping
  • Stay on top of invoices
  • Be responsive to change
  • Project your cashflow

Accurate bookkeeping

Without accurate bookkeeping you are at risk of overspending, underinvesting and/or wasting valuable resources. If you are wasting cash or over committing, the future of your business will be at risk.

On the other hand, if you have additional money available, but are unaware of it, you may miss out on investment opportunities, which could help your business grow and increase competitiveness.

Stay on top of invoices

You need to make sure you are on top of your invoices if you are to succeed. Selling products and gaining clients is great, but without being paid your business will suffer. Issuing invoices and chasing unpaid ones can take time but without carrying out this task your cash flow will suffer.

Be responsive to change

Being flexible and responsive to change is the make or break of any business. Knowing when to save or spend is an important skill. You must be able to adapt to changes in the market and fluctuations in cash flow.

Taking advantage of high sales/high cash flow by investing and building reserves can help reduce the impact of periods of lower income.

Projecting cash flow

All companies need to plan ahead. Without projecting cash flow, both short and long term, it is difficult to assess the financial stability of your company.

There are a wide range of tools available for projecting your cash flow, such as as QuickBooks, XERO and Sage. These tools can speed up the process and allow you to play out different scenarios based on different levels of income and outgoings.

One major issue with projecting cash flow is being dependent on clients and customers paying their invoices on time. Invoice finance is becoming an increasingly popular finance product as companies look to reduce the impact of late payments on their cash flow.

5 types of small business loans that could help your financial health

Asset Finance

Asset finance is a way to raise funding if you are looking to refinance or purchase new assets.

When purchasing new assets you can borrow the amount the asset costs, providing you meet affordability criteria. 

If you are looking to refinance assets to release money tied up in your company assets, then you can take out lease or HP agreements to release equity held in those assets.

Working capital loans

Working capital loans are sometimes referred to as cash flow loans and are used as a quick cash injection into a company.

While there is no limit on how much you can borrow, loan amounts are determined by your credit status and company financial health. Lenders each have their own lending criteria and maximum amounts.

Unsecured Business Loans

Unsecured loans are good option for businesses looking to raise money without using personal or business assets as security.  Unsecured finance is a great way to boost cash flow without using collateral.

They are generally available over terms from 3 months to 5 years depending on the purpose of the business loan.

Vat and Tax Finance

All business will have VAT and tax liabilities that must be paid on a regular basis. These bills can be one of the biggest drains on your company cash flow. Fortunately, there are a wide range of lenders that specialise in VAT and tax loans.

Invoice Finance

Invoice finance can be used if you want to release cash tied up in unpaid or slow paying invoices.

There are two main types of invoice finance

  • Invoice Factoring – The lender will carry out invoice administration and chase any outstanding invoices
  • Invoice discounting – You carry out invoice administration and oversee your debt ledger

Which loan is right for your business?

The best business loan for you and your company depends on what the loan is for. There are a wide range of different types of finance options available for different purposes and financial statuses.

There are too many factors and variables to take into consideration, and these vary from business to business, to say that one type of loan is the best for you and your needs.

When assessing which type of business loan is the best one for you, you must think about

  • Rates/Interest – How much will the finance facility cost you in full
  • Fees – What fees are involved
  • Loan amounts – Does your business need a small loan or a large amount?
  • Repayment schedules – Short term business loans or long terms
  • Impact on financial health – Will the loan have a positive impact on long term health

If you are struggling to keep track of your cash flow, then speak with your accountant or a professional.  If you are struggling for free cash, you can apply for cash flow finance.  If your business is making a loss, increase sales through marketing or look to diversify.

Whilst RLA Capital cannot offer financial advice, we can provide various financial products to assist with cash flow.  RLA Capital would recommend speaking with your accountant if you are experiencing cash flow problems.

Updated: March 10, 2022