How to manage and protect cashflow during difficult times

When a recession hits, it’s important to ensure that your start-up protects its cash flow so it can pay its debts and continue to operate without running out of money.

Maintaining a positive cash flow is vital for any business.

It helps ensure you have money on hand to pay bills, such as staff wages, and to fund further business growth.

Increased costs, such as more expensive raw materials or higher energy bills, coupled with fewer customers that spend less, can place stress on your cash flow.

Taking measures to keep control of your finances can help maintain a positive cash flow and prevent your start-up from running out of money.

What is cash flow?

Cash flow is the money that comes into and out of your business.

More money coming in than going out is a positive cash flow.

Conversely, more money leaving your business than coming in is a negative cash flow.

While it can be expected for start-ups to experience negative cash flow, having more money leaving than coming in for sustained periods can put your business in a poor financial position.

Make sure you have enough cash at hand – known as liquidity – to sustain periods of negative cash flow.

Tips for managing and protecting cash flow

Your start-up can take steps to help manage and protect cash flow.

1. Get paid quicker

Ensuring you get paid quickly and on time can help manage your cash flow.

One way to do this is by automating invoices to send as soon as a purchase is made to decrease the time waiting for payment.

You can also speed up payments by offering customers several ways to pay, including online methods.

Online payment makes it easy for customers to pay using various credit or debit cards or payment systems such as PayPal, Google Pay, or Apple Pay.

Always ensure your payment details are correct and clearly labelled on invoices to make it easier for customers to pay.

Read our guide to creating customer invoices.

2. Cut down on expenses

Reducing unnecessary business expenses may help save significant amounts of money, boosting your cash flow.

It’s worth thinking about areas you may be able to cut back on spending, such as office supplies.

You could also consider cutting back on the amount the business uses or look for cheaper alternatives instead.

Limiting employee expenses can also free up extra cash.

It can be a good idea to require employees to clear purchases with you before making them so you can keep tabs on expenditure.

Consider flexible and hybrid working if appropriate for your business, as this reduces the time staff spend in the workplace, which can reduce energy bills.

If your workforce can work from home, consider downsizing business premises for a more cost-effective location or even switching entirely to remote working and ditching the workplace altogether.

3. Switch energy suppliers

With energy bills rising significantly, you may wish to consider changing energy suppliers.

While the government is committed to supporting businesses with the rising energy costs through the Energy Bill Relief Scheme, it may be worth checking to see if other energy suppliers offer lower tariffs.

4. Build cash reserves

Starting a business can be unpredictable.

Employees can leave, equipment needs replacing, payments may be delayed, or you may lose a major customer - all of which can put unexpected pressure on your finances.

Building up a cash reserve can help protect your business from unexpected circumstances, and ensure you have enough money for essential costs such as wages and tax bills.

Consider putting aside money into a business emergency fund.

5. Control your inventory

Inventory management can help reduce expenditure on stock.

Keeping track of how much stock you have can help you avoid overbuying stock.

Held stock can be a liability if customer demand drops and may incur additional costs such as warehousing.

Look at your biggest sellers and focus on building inventory that your customers will buy.

Consider sales and discounts to help clear old stock and raise cash.

6. Financial forecasting

Financial forecasting involves a cash flow forecast, predicting the amount of cash coming in and out of your business over a set period.

This can help you identify potential periods of negative cash flow.

You can then take measures to control costs, giving you enough cash to weather periods when your business generates lower income.

7. Tackle late payments

Late payments may negatively impact your cash flow.

Ensure your invoices have clear payment terms, including the date to receive payment.

Some accountancy software can send automatic reminders after payment becomes due.

Set incentives for customers to pay on time or consider charging interest on late payments.

8. Look for tax relief

Your start-up may be entitled to tax reliefs and breaks, which could help improve your cash flow.

Check out the gov.uk website for the various reliefs that may be suitable for your business.