10th March 2022

Why managing SME cash flow is critical for SMEs

Why managing cash flow is critical if you’re an SME

Cash is like oxygen to SMEs - and without a reliable supply coming in, you could find your business suffocating. That’s why if you’re a small business, managing your cash flow is critical to success. But what exactly does the term ‘cash flow’ mean, and why is managing it so important?

Understanding SME cash flow

Cash flow essentially refers to the total amount of money that is coming in and going out of a business. You might’ve heard this referred to as ‘inflow’ for money coming in, and ‘outflow’ for any money that you spend.

If you’ve got more money coming in than going out - known as a positive cash flow - you'll be able to confidently keep the day-to-day activities of your business ticking over. Things like paying bills, buying supplies, and paying rent or salaries is much easier when there’s cash in the bank.

On the other hand, if you’re spending more on things like stock, insurance, training or staff costs than you’ve got coming in, you’ll find yourself confronting a negative cash flow.

There are several things that affect your cash flow, from the specifics of what’s coming in (depending on your prices, profit margin, and how quickly your customers pay) to the level of expenditure you’ve committed to keep running or growing.

What happens if you don’t manage cash flow

Lots of businesses face challenges with cash flow, but start-ups and SMEs are most likely to struggle. In fact, 82% of SMEs fail because of cash flow problems. That makes sense - when you’re trying to grow quickly, develop your products or services, and need lots of investments, it’s easy to rack up lots of outflows quite quickly.

But if you’re facing a negative cash flow for a prolonged period of time, it can be really bad news for your business. You might not be able to keep buying the stock or supplies you need, could struggle to pay your team (and yourself!) and, worst case, could face compulsory liquidation if you can’t keep up with debt repayments.

So, what can I do to manage cash flow?

One of the best ways to keep on top of your cash flow is to make sure you’re getting paid on time by your customers. Right now, SMEs are currently chasing over £50bn of unpaid invoices which are late. Aside from stunting your cash flow, this means you're busy chasing customers, having tricky conversations, and, ultimately, spending less time on doing what you're best at: running your business.

Alternatively, if you’ve got a lot of customers who owe you money, you can access that cash with invoice finance. Invoice financing means selling your unpaid invoices to a company (like us at Optimum Finance), who’ll buy them from you and give you the cash (minus a fee). Essentially, it’s a way to unlock cash trapped in unpaid invoices quickly - so you can leave worrying about the invoice chasing to someone else.

The bigger picture

For some industries, invoice finance is what keeps the lights on. Companies that trade on credit and have up front expenditures need that additional cash flow immediately and don’t have the option of waiting for their customers to pay.

This is the case for our client, Anze, a reusable surgical gowns manufacturer. Anze supply PPE for keyworkers and during the COVID-19 pandemic found themselves facing a huge increase in demand. Using our invoice finance service gave them confidence in their cash flow to meet this unforeseen demand. They never had to worry about buying supplies, paying bills in the factory, or being able to pay their hard-working team on time - meaning they could focus on delivering their critical product to the people who needed it most. Being able to meet the increased demand was great news for ANZE and their customers, and it’s exactly why we love doing what we do.

At Optimum Finance, we utilise innovative technology to offer a range of flexible funding solutions, which grow alongside your business. Get an instant quote for the amount of funding you could access by entering your annual turnover into our finance calculator. Products include invoice discounting and factoring that can boost your cash flow and give you access to a dedicated credit control team.

Email or call us to speak to our experienced team of experts and find out how invoice finance could help your business. We pride ourselves on getting things done quickly and providing access to cash within 24 hours of approval. We are passionate about finding solutions and delivering to clients’ needs.