How to manage cash flow for growth

At a glance

  • As exciting as it is to build your venture, be careful not to get carried away. When a business grows too quickly, it’s easy to run into cash-flow problems, which could be fatal.
  • Improve cash flow by formalising invoicing and credit-control processes. Beyond that, make sure to track how your growth initiatives are performing and if the cash you’re investing is showing a return.
  • Keep an eye on your business’s credit rating and look to improve it by providing additional information. A higher credit rating could help you negotiate more favourable terms with suppliers.

As an early-stage business owner, you’re likely bursting with ideas for your company’s growth. You must plan this phase carefully; a key reason many small businesses fail is not lack of demand for their product or service, but because they grow too quickly and run out of cash.

Sales growth can decrease cash flow, as it typically requires higher spending on your overheads – for example, recruiting additional staff, increased inventory and maintaining a more complex service. These, combined with rising costs in many industries – such as costs of raw materials, energy costs and wage inflation – are piling pressure onto profit margins.

For business owners, it’s critical to maintain positive cash flow to keep funding that growth, as rampant inflation cuts into margins and high interest rates make it harder to raise and service debt.

How to improve cash flow

Increasing your own prices may not be a realistic option – for example, if you have contracts locked in at lower rates or are in a price-sensitive market. So how should you tackle the challenge and keep cash flowing?

Rob Jones, founder of RJF Accountants, says the first thing is to plan realistically and expect a temporary period of negative cash flow as you scale up. That’s normal as expanding your business often requires you to spend more than you currently earn. But it’s not a long-term solution. Building cash reserves will be critical, as a buffer will help bridge this gap and avoid unforeseen costs scuppering your plans.

Careful cash-flow management can help you grow safely and affordably while maintaining quality standards, says Rob. Actions could include:
•    sending invoices immediately – don’t wait until the end of the month 
•    checking invoices before sending to avoid errors delaying payments
•    where possible, renegotiating terms with clients and suppliers – such as days-to-pay and advance or staged payments 
•    setting late-payment charges to give clients an extra incentive
•    forecasting cash flow – know what sums you’re expecting in and out, and how that will impact your investment plans.

These initiatives may seem simple, but together they can make all the difference as cash flow tightens during your first growth phase.

Track how your projects are performing

As the business grows, working capital might be spent on projects such as new product initiatives or alternative routes to market. Growing firms can run into cash-flow problems here if they’re not tracking exactly what return they’re expecting and how they will achieve it. Agreeing those parameters in advance allows you to ensure you don’t overextend yourself – especially when working capital is hard to come by.

Your strategy needs to identify the key customers and growth areas you will focus on over the next 12 and 36 months. Without that discipline, you may try to be ‘all things to all people’ and spread yourself too thinly. That’s when spare cash can become a risk rather than a benefit.

Try to be realistic about what new projects you can start in the coming year and over the next three years, then build them into your business plan and strategy. If a better opportunity arises down the line, you can adapt and reallocate budgets.

Your plans should also clarify what you require and how much contingency is appropriate for your growth plans. Ensure your senior team has access to reliable financial-management information and use it regularly to support decisions. Good cloud accounting software can also help here.

Know your business credit score

Tracking your firm’s credit rating and understanding how it can impact your business is an effective, low-cost but underused way to improve working capital. You can also provide additional information that isn’t publicly available to ratings agencies, such as up-to-date management accounts – rather than annual statutory filings – or contextual information about your business and its market position.

Based on this information, the agency could improve your rating, which could then result in you receiving better credit terms from suppliers – meaning a boost to short-term working capital at little or no cost. You can do this directly with rating agencies or via platforms that link you with the agencies quickly and seamlessly.

These platforms also enable you to track the credit ratings of your supply chain or clients and will alert you to any changes. This can help you manage your debtor book, giving you advance warning of a client becoming a late or non-payment risk, or a supplier getting into financial trouble or going bust.

This awareness of credit ratings, alongside the other initiatives discussed, can significantly impact the health of your cash flow and working capital. This can help you navigate your growth journey safely despite the tough economic climate.

Get in touch

To make sure your growing business is as cash efficient as possible, get in touch with us today.

SJP Approved 25/09/2023

Sovereign Wealth Hong Kong is a Partner Practice of St. James’s Place (Hong Kong) Limited

The ‘St. James’s Place Partnership’ and the titles ‘Partner’ and ‘Partner Practice’ are marketing terms used to describe St. James’s Place representatives.

Members of the St. James’s Place Partnership in Hong Kong represent St. James’s Place (Hong Kong) Limited, which is an insurance broker company licensed with the Insurance Authority (Licence No. FB1075), a licensed corporation with the Securities and Futures Commission (CE No. AAV439) and registered as an MPF Intermediary (Registration No. IC000852).