6 essential cash flow tips for sole traders

Turnover is vanity, profit is sanity, but cash is reality. It’s a well-known saying – but what does it mean? Well, it doesn’t matter how many sales you make or the level of margin you add.…

5 Minute Read

Last Updated: 11th November 2022

Turnover is vanity, profit is sanity, but cash is reality. It’s a well-known saying – but what does it mean? Well, it doesn’t matter how many sales you make or the level of margin you add. How much cash you can access ultimately determines the survival and success of your business. Cash is king.

Why is cash flow important?

Cash is the lifeblood of all businesses. If you can’t get your hands on enough cash to pay your bills when required, it could soon be game over for you. Even seemingly profitable businesses with many customers have found that out to their cost. Keeping your cash flow healthy must always be a key priority for your self employed business.

What is cash flow?

Cash flow and profit aren’t the same thing. Profit is how much is left when your total costs are taken away from your sales. Cash flow describes the relationship between cash entering and leaving your business. Your cash flow is positive when there’s a surplus of cash within your business, while negative cash flow can result if you spend more than you make or your credit control falls short. 

Why healthy cash flow is important

Effective cash flow management enables your business to keep its cash flow positive. It takes hard work and determination, but if you can keep your cash flow healthy it can save you lots of time and hassle. And rather than worrying about how you’re going to pay your bills and yourself, you can concentrate on other, less stressful things.  

Here are 6 essential cash flow tips.

Cash flow tip #1 – Minimise your costs

Eliminate all unnecessary spending from your business. If you don’t need it – don’t buy it. Your monthly business costs should never be more than your monthly business income. Negotiate firmly and seek best-possible value from all your suppliers, because the less cash leaving your business, the healthier your cash flow. Regularly assess your costs and cut where possible.

Cash flow tip #2 – Maximise your margins

Caution is advised when setting prices. Go too high and you’ll put off customers; too low and you’ll needlessly throw away profit. Your prices must be set at an optimum level that maxmises your profit while remaining acceptable to your customers. Sound knowledge of your customers and competitor prices is crucial when setting/increasing your prices. Many businesses are reluctant to increase their prices for fear of losing customers, but not doing so will affect your cash flow if your costs have increased.    

Cash flow tip #3 – Seek favourable credit terms

Try to negotiate as favourable credit terms as possible from your suppliers. The more time you have to pay your suppliers, the better for your cash flow. But don’t just simply ignore your suppliers’ payment terms, as they could withdraw any credit. If a supplier asks you to spend more to get more credit – carefully consider the cash flow implications.  

Cash flow tip #4 – Don’t be too generous with your credit terms 

Allowing your customers high levels of credit and giving them more days to pay than your standard terms will also impact your cash flow. If possible, with new customers, don’t grant any credit until your relationship is better established. For higher value sales and longer-term contracts, ask for part or staged payments, which will ease any cash flow concerns.

Cash flow tip #5 – Send your invoices ASAP

The longer you take to send invoices to your customers, the worse it is for your cash flow. As soon as your product or service is supplied or delivered – issue your invoice. If cost-effective, you could offer a small discount for prompt or even early payment.

Cash flow tip #6 – Chase payment as soon as it’s due

Sound credit control is critical to cash flow management. Shortly before an invoice is due for payment, send a polite reminder to the customer. If you’re not paid when due, send them another polite but firm email. If there’s no response, phone them to politely request immediate payment. Remain determined – remember – you’re asking for your money. Good customers will understand. But some tact is required, because they could be waiting for payment from their customers.

Some final cash flow tips

  • Many businesses experience occasional cash flow problems – they’re not unusual. But persistent cash flow problems aren’t a good sign, so you probably need to make some fundamental changes to get things on a better footing.
  • Although it can be difficult if you lack experience or your businesses has limited trading history, producing reliable cash flow forecasts, based on likely sales and costs, can enable you to look ahead and identify times when your business risks running out of cash. Then, hopefully, you can take steps to stay out of trouble before it’s too late.
  • Invoice finance can provide a cash flow solution. This is where a bank or other provider buys your unpaid invoices (usually for a percentage of the due amount) and either you or they pursue payment from your customer. Although, ultimately, you get less cash, you get it sooner, which reduces cash flow pressure.

If your business regularly experiences serious cash flow problems, you really must do something about it – before it’s too late. Your accountant may be able to provide some useful advice. Simply ignoring the problem in the hope it will go away isn’t wise.

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Blog content is for information purposes and over time may become outdated, although we do strive to keep it current. It's written to help you understand your Tax's and is not to be relied upon as professional accounting, tax and legal advice due to differences in everyone's circumstances. For additional help please contact our support team or HMRC.

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