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How to use cash flow management to keep on top of costs

Most small companies go bust before they reach the two-year mark (no matter how good their business idea is). Costs are almost always the cause of this demise and the reason for this is that it’s incredibly difficult for businesses to manage their finances at the startup stage.

cash flow management

Cash flow management is an absolutely vital tool if you want your small business to reach its third birthday. Why? Because it allows you to cover your expenses and to do so at the best time for your company.

ICompario have highlighted three examples of how you can use this strategy for your business. They’re applicable to any type of company and an accepted set of tactics for startups, SMEs and conglomerates, giving them added credibility.

Taking out business loans for big commitments

You might baulk at the idea of taking out a business loan. It’s a big financial commitment, one that comes with real consequences for your company if payments are missed.

But there’s a cash flow management benefit to getting a loan, as it gives you immediate access to capital that otherwise would have taken a long period of time to accumulate. The benefit of doing this is that you can drive up growth quicker, increasing the flow of cash into your business and potentially making it easier for you to manage your costs.

There are two main choices for business lending:

  • Bank loans: There are a number of banks that will give you a loan as long as you meet their requirements
  • Government loans: the UK government offers start-up loans for new companies

There are strengths and weaknesses to both these types of borrowing. Bank loans have a steeper borrowing limit but charge a higher interest rate. Government loans are for smaller amounts but are backed by the most reliable financial institution in the UK.

We must offer a note of caution before you commit to getting a business loan and use it to manage your cash flow. This type of borrowing should be for things that bring a tangible, long-term benefit to your business rather than addressing a short-term cash flow problem. An example of this is something that gives your business a physical asset, such as investing in an office building.

Performance-based salaries for your employees

Performance-based salaries are nothing new. They’ve been a feature of sales roles for many years, while lots of public sector jobs also incorporate elements of this into their pay models.

Indeed, a report by PayScale even found that 65% of American employees prefer jobs with an element of performance-related pay. Granted, the culture in the States is different but it’s still a useful and informative statistic that does have relevance to UK companies.

Now that it’s clear performance-based salaries aren’t abnormal and that they are valued by at least some workers, we’ll explain how it helps you to keep on top of costs.

It’s pretty simple. Your employees’ wages are almost certainly your biggest expense and thus represent the greatest amount of cash flow that needs to be managed. Performance-related salaries help with this management because it means you can pay your workers less upfront without reducing their overall remuneration.

In fact, we say that for this strategy to really work you need to increase the financial package your workers can get. Why? Because it incentivises them to work harder, deliver better results and bring in more revenue for your company.

Using business cards for company expenses

People often fall into one of two categories with business cards (whether they’re credit cards, fuel cards, trade cards or another example of this type of borrowing). They either think they’re a great idea or a terrible one.

The truth is they have very real cash flow management benefits, as they allow you to cover necessary company expenses and then pay for them at time that’s more convenient for your accounts team —  or you, if you’re the accounts team! This means that you can manage your cash flow by diverting funds to bills that need to be paid immediately (such as salaries).

We’ve already referenced the three primary options for business cards:

  • Credit cards: Capital on Tap is highlighted as one of the top credit cards for startups
  • Fuel cards: fuelGenie is believed to be one of the best options for small businesses
  • Trade cards: Trade point is a card that’s often recommended for new constructors

Each of these three choices have their pros and cons. Credit cards can be used for the broadest range of items but charge interest. Fuel and trade cards are restricted to specific items (travel and construction expenses respectively) but often charge low or no interest.

We need to urge a moment of pause before you decide to invest in one of these business cards. They can be a great way of managing your cash flow, but only if you use them responsibly. By this we mean two things. Firstly, buying items that are actually essential. Secondly, settling your bill on time. If you keep to both these things then you’ll have a valuable tool for keeping on top of your costs.

Business loans, performance-based salaries and business cards are three great examples of how you can use cash flow management to control the costs associated with running a small business.

While it might be that not all three of them are immediately appropriate, there will be a time when each of them offers real value to your company. If that time is now then start using them as soon as you can to begin feeling the benefits as quickly as possible.

More on business finances and managing your cash flow.

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