Managing Cashflow In A Cost Of Living Crisis

Controlling costs and effective cash management are vital functions for startups to execute plans and build a strong business. 

This is crucial during a cost of living crisis when new ventures require careful nurturing but face threats from rising interest rates, high inflation, record energy costs and customers with limited spending power. Global small business platform Xero in its 2022 report, ‘Xero Small Business Insights’ found cashflow challenges are undermining the growth and operations of at least 9 in 10 small businesses in the UK. 

Most startups fail because of cashflow problems, not a lack of profitability. Cash management doesn’t mean businesses shouldn’t spend or invest. It means they must plan, prioritise and be financially disciplined. Read on to find out how to plan a cashflow forecast, how to operate it by managing the purchase and sales ledger effectively and how this delivers a cash management process that allows your business to flourish,

Cashflow fundamentals

Essentially, cashflow involves managing income and outgoings to cover financial obligations as they become due. This is managed through the sales and purchase ledgers, which can be aided by using accounting software. Careful control of these functions helps achieve effective cashflow management.

Biannually, businesses should prepare a budget outlining regular monthly expenditure and irregular costs, for instance buying new equipment. Compare this against a sales forecast covering the same period. Then build a daily, weekly, and monthly cashflow of all income and outgoings to plan ahead.

Cashflow forecasts

A cashflow forecast is a list of outgoings and income. The crucial element is the timing of both and knowing when and how to plug any gaps. Startups need to manage and balance both to pay liabilities on time and know when spare funds are available to invest in the business.

There are free templates available and you don’t need accounting skills to produce a basic plan, just detailed knowledge of your business and its future plans.

Start with regular outgoings like payroll, rent, utility bills and tax payments. Prioritise these or your staff won’t be happy and tax authorities aren’t flexible about when they are paid.

The other side of cashflow is income. When it arrives depends on whether sales are paid immediately or if you offer credit to customers. The aim overall is to receive income a bit quicker than you pay outgoings. That creates a healthy cashflow.

One practical strategy is to assume a certain proportion of credit term payments will be late. Build that contingency into the cashflow so late payments have less impact. 

More on this: head to our comprehensive guide on how to create a cashflow forecast for more information and tips.

Budgeting for growth

All startups plan to grow and as they do cashflow management can become more challenging, even as revenue increases.

As sales orders become bigger, overheads increase as you invest in staff, materials and other equipment to complete an order. Costs relating to work in progress (WIP) must be met, usually, before income is received. This increases pressure on cashflow, particularly during a cost  of living crisis.

Resorting to a loan, overdraft or invoice financing to fund growth can cost more than funding through organic cashflow. 

Purchasing

Try and negotiate payment terms that are as long as possible. This is challenging for startups when negotiating with larger suppliers, but as you prove reliable, they may extend payment terms. Negotiate competitive prices. Consider bulk buying or wholesaling to negotiate discounts. Our guide to how to buy from wholesalers can help.

Some suppliers may offer discounts for immediate payment but balance the benefits against the impact on cashflow. Bringing a payment forward may be impossible if income doesn’t match timing-wise.

Payments to key stakeholders – such as suppliers – must be prioritised. Plan for two payment runs per month. You will likely have limited funds for each. Carefully select which payments you must make and which can be delayed to the next payment run.

Try and avoid making ad-hoc payments, as this makes cashflow planning and management more difficult.

Sales

Get the sale and everything else will follow is a golden rule, but for successful cash management so is accurate invoicing. 

Don’t give customers a reason not to pay. A wrong figure, purchase order number or even date can give a customer an opportunity to delay payment, negatively impacting your cashflow. Like you, they will be under pressure, looking for reasons to delay a payment to manage their own cashflow.

As well as accuracy, timing is important. Once an order is complete, send out an accurate, detailed invoice quickly. When payments are received, allocate the payment against the sale so you know what payments are still due.

Automating the process through e-invoicing or using accounting software makes it easier for customers to pay and can eliminate obstacles that delay payment.