Our 5 point plan for better cash flow in 2022

When it comes to determining the health of your business, nothing indicates success or failure more than cash flow; the net amount of money that flows in and out of your business.

Cash flow feeds a business and is its lifeblood, so for business owners it needs to be a constant focus.

1. Plan for uncertainty

It’s been two years since the pandemic first cast its long shadow over all aspects of our society. Ever since then, business agility and the ability to move with changes has become all the more important.

There’s no denying that UK businesses have faced significant disruption over the past couple of years. If there’s one certainty, it’s the fact that nothing is certain! In a matter of days you could be forced to shift and adapt your ways of working, and having a cash reserve can help you to manage challenges.

Some businesses will face more difficulties than others in the new year. From supply chain issues to repaying Coronavirus funding - there are lots of factors to consider. The best way you can protect your cash flow in 2022 is by ensuring you’ve planned for multiple scenarios.

Flexibility is crucial when preparing your business to navigate potential challenges the new year could bring. You don’t want to be taken by surprise, so be sure you have plans A, B and C ready. While doing this, set targets to build on your business’s emergency fund.

2. Spend time reviewing your cash flow statements

Taking some time to review and analyse your 2021 cash flow statements will give you a better understanding your business's cash flow trends.

These trends help to provide crucial insights into your business’s cash flow patterns. Because your cash flow statements can determine whether or not your company generates enough money to meet operating costs for specific periods of time, they are indispensable tools for this year’s planning.

Use these documents to identify areas of weakness and make smarter decisions for 2022. Running a company is a constant learning process, and there is always room for improvement when it comes to making better business decisions.

While your cash flow statements are invaluable for better management, so too are the rest of your business’s financial documents. Take note of your balance sheet and income statements and gain a broader picture of your business’s overall financial health. This way, you will be able to start the new year with greater knowledge and power.

3. Revisit your invoice terms and conditions

As you probably already know, the UK’s late payment culture remains an issue that was only made worse by the Covid pandemic. Despite the Prompt Payment Code’s reforms coming into effect in July 2021, a huge number of businesses are still operating in cycles of delayed payments.

We know that invoice management is crucial to proper cash flow management. The pair go hand in hand. If your business has faced problems in this area, then you need to seriously consider how you can change this in 2022 and reduce lags in payment collection.

One way to do this is to get strict about your invoice terms of payment. These should be clearly stipulated both on invoices and within contract terms. You should also outline the steps you will take if payment terms are exceeded, such as charging late payment fees or seeking legal action.

Another way to manage this is using invoice finance, a solution that’s having a hugely positive impact on cash flow. More and more businesses are choosing to alleviate the stress of unpaid invoices entirely with this solution.

Gone are the days where you have to wait upwards of 60 days to receive payment from suppliers. With invoice finance, you can choose to advance invoices as and when you please, receiving the money you’re owed straight away in return for a small fee.

4. Manage your business’s inventory

A huge amount of money can get wasted through poorly managed inventory. By taking time to properly organise this for 2022, you can help to reduce wastage and boost cash flow.

At this point in the year you want to ensure your business has optimal stock levels. Too little and you run the risk of impacting cash flow and your ability to purchase more in the new year. Too much and you run the risk of not being able to sell enough if demand dries up.

During this time you should analyse slow moving stock and work out how much these items are costing you in tied-up working capital, warehouse shelf time and storage costs. This is even more important for businesses that stock perishable goods with the potential to expire.

Look at all areas of inventory management. Are you paying competitive rates? Are your suppliers delivering goods on time? Do you have a lot of cash tied up in stock that you need to shift?

5. Set cash flow resolutions

The start of a new year always brings talk of resolutions. For businesses, setting actionable goals can be a great way to make improvements year on year and track how far your company has come over time.

With that being said, the resolutions you set should always be realistic. Aim high, but not so high that you’ll end up disappointed or discouraged when things don’t go to plan. Some examples of good resolutions you can set include:

  • Reduce invoice payment terms from [ - ] days to [ - ] days

  • Grow your emergency cash reserve from [£-] to [£-]

  • Set new invoice terms (ask for initial deposits etc.)

  • Ensure cash flow is being accurately tracked by [ - ]

  • Upgrade your cash flow management software

  • Set deadlines for existing debt payments

  • Clear out existing inventory by [ - ] date

  • Mitigate periods of low cash flow with plan A, B and C (see Point A above!)

The start of a new year signifies new beginnings and fresh possibilities. It’s an exciting time to be in business, with opportunities for growth on the horizon.

From the whole team at Penny, good luck and here's to a successful and prosperous 2022 for all!

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