This article was originally published on 21st March 2022. The article has since been updated on 19th January 2024.

Poor cash flow can have many causes: delayed payments, spiralling expenses or not charging enough. But macro-economic factors can create even more pressure for businesses trying to manage their cash.

In recent years business owners have faced a perfect storm, with inflation, interest rates and energy costs all rising.

• High inflation: Inflation can trigger higher costs for raw materials, meaning narrower profit margins. Businesses may have to put prices up, which could deter customers from spending. Ultimately, it could result in a business not earning enough to cover its costs. 
• Rising interest rates: Business owners will pay more interest on loans and credit cards when rates rise. It may also mean customers saving more of their earnings to gain higher rates of interest, instead of buying a product or service with that money. Again, this could create a cash flow imbalance as fewer customers buy. 
• Surging energy costs: When energy bills escalating sharply, businesses will face rising costs as they pay more to heat and power work premises, while customers may have less disposable income to spend on goods and services. Rising costs and falling revenue can lead to more money going out than coming in.

Each of these factors individually can have a detrimental effect on a business’s cash flow, but all three combined may signal a higher cost of doing business, more cautious customers and revenue challenges.

In the event of a cash crunch, it is important that business owners meet the issue head-on and build a strategy. Consult your accountant as early as possible as they can help with the steps below and future-proof your plans for worst case scenarios. 

1. Use cash flow forecasting

Cash flow forecasting can help predict the future availability of cash to the business and is a must, especially in challenging times. Cash flow forecasts are never going to be 100% accurate, but they’re a useful tool to help predict if and when you might run out of money, or have a surplus of cash, and test the impact of saving any costs.

The best approach when putting together a forecast is to predict your sales, profit and your cash in the bank, and then compare the figures to actual sales, profit and cash as you go. 

As part of this, examine your outgoings and if there are ways to save money without damaging your brand, it may be a good idea to do so as soon as possible. 

2. Review your debtors

It can be tempting for small business owners to allow customers to negotiate discounts on their prices, or give grace periods to those who don’t pay on time. But this can cause an awful lot of cash flow issues. So in other words, as a small business owner, make time to review your trade debtors (customers who owe you money), and think about whether you still want to do business with customers who have to be chased every time, pay you late or haggle over your prices.

3. Simplify customer payments

Making it easier for customers to pay can have a positive effect on cash flow. For example, if you insist on customers sending you a cheque, could you make it easier for them to pay? Can you take bank transfers or a credit card payment? Customers will pay you more quickly if they can do it more easily.

4. Consider short-term loan options

A short-term loan from a bank or a family member can help a business struggling with cash flow. But remember: a bank will expect to see your cash forecast before granting you a loan, and will need to be comfortable with your ability to pay it back. 

Don’t attempt to borrow more than you can afford to pay back, and remember that when interest rates rise, your repayments could increase over time, so read the small print and build the loan into your forecast.

5. Keep an emergency fund

It’s also a good idea to keep emergency funds available to cover costs during times of cash flow difficulties. The amount you will want to have saved up depends on the size and type of business, but there should be enough cash on hand to see the business through a period of poor cash flow.

6. Monitor and revise your figures regularly

If you’ve had one cash flow issue, don’t pretend it never happened; you have to prevent it from happening again, if at all possible. Make sure you monitor your cash very regularly, as it goes in and out of your bank account. Always know how much you’ve got – and how much you can afford to spend.

Finally, in such an unpredictable environment, it pays to watch economic indicators and world events (for example, view Economics Weekly here), and try to plan your cash flow accordingly. Anticipate the effect these events will have on your cash flow, and on the economy as a whole. For instance, if fuel prices rise, what will that do to your bank balance?