For small business owners, freelancers and bookkeepers, cash flow is the key to financial stability – how you manage it effectively can mean the difference between thriving and just surviving. Yet, many SMEs struggle with cash flow issues, often due to late payments, unpredictable expenses and poor financial planning.

In this guide, we’re breaking down what cash flow is, as well as exploring some of the most common challenges and outlining strategies to keep your cash flow healthy and your finances in the green. 

What is cash flow?

Cash flow refers to the movement of money in and out of your business. It includes payments received from clients (AR), supplier payments (AP), revenue from sales, operating expenses and other financial transactions.

Why cash flow management is crucial for SMEs

Unlike large corporations with substantial reserves, small businesses often operate without much cash in the bank. Effective cash flow management ensures you have enough liquidity to cover expenses, pay employees and invest in growth opportunities. Without it, even profitable businesses can face difficulties meeting financial obligations, which can result in stress, missed opportunities and even insolvency in the worst cases.

Good cash flow management helps you:

• Maintain a steady financial cushion for unexpected expenses

• Avoid reliance on expensive short-term loans

• Strengthen relationships with suppliers and clients by making and receiving payments on time

• Plan for growth and long-term financial stability

Common cash flow challenges for small businesses

While every business is unique, many SMEs face similar cash flow challenges. Understanding what these are can help you take proactive steps to avoid them.

Late payments from clients

One of the biggest challenges for small businesses is late payments. When clients don’t pay on time, it disrupts your cash flow and can make it difficult to cover expenses. According to reports, UK SMEs are owed billions in late payments annually, creating financial strain for many businesses.

High overhead costs

Fixed expenses like rent, salaries and utilities can take up a significant portion of your revenue. If not managed properly, these costs can quickly drain your cash reserves, leaving little room for unexpected expenses or growth investments.

Poor inventory management

For businesses that sell physical products, inventory management can be a major cash flow drain. Holding too much stock ties up capital, while too little can lead to missed sales. Striking the right balance is key to ensuring smooth cash flow.

Seasonal revenue fluctuations

Many businesses experience seasonal variations in sales, making it difficult to maintain consistent cash flow. Without careful planning, slow months can lead to cash shortages that impact operations.

Unplanned expenses

Unexpected costs, such as equipment breakdowns, emergency repairs, or regulatory fees, can strain cash reserves and disrupt your financial plans.

Strategies to improve cash flow

Don’t worry, it’s not all doom and gloom. Now that we’ve identified the challenges, let’s explore some strategies to keep your cash flow healthy.

1. Create a cash flow forecast

A cash flow forecast helps you predict your income and expenses over a set period of time. By understanding when money will come in and when it will go out, you can plan ahead and avoid cash shortages. Our free cash flow management tool can help you with that. 

2. Invoice promptly and follow up on late payments

Send invoices as soon as possible and set clear payment terms (e.g., 7, 14, or 30 days). Follow up with reminders before and after the due date to encourage timely payments. It may also be helpful to consider offering early payment discounts to incentivise prompt settlements.

3. Negotiate better payment terms with suppliers

If possible, negotiate extended payment terms with suppliers so you can keep cash in your business for longer. Some suppliers may also offer discounts for early payments, which can help reduce costs in the long run.

4. Reduce unnecessary expenses

Regularly review your expenses and identify areas where you can cut costs without impacting your operations. This could include switching to more affordable software, renegotiating contracts, or eliminating unnecessary subscriptions.

5. Build a cash reserve

Setting aside funds during profitable months can create a financial buffer to cover slow periods or unexpected expenses. A healthy reserve can also help you stay afloat during economic downturns.

6. Leverage financing options

Short-term credit solutions, such as invoice financing or business credit lines, can help bridge cash flow gaps. However, it’s important to use these options strategically to avoid accumulating excessive debt.

How Mimo can enhance your cash flow management

Managing cash flow manually can be time-consuming and stressful. Providing you with automated solutions for accounts payable and accounts receivable and a pre-approved credit line, Mimo makes it easier. 

With our accounts payable features, you can:

• Automate supplier payments, ensuring they’re made on time

• Track all outgoing payments in one intuitive dashboard

• Reduce manual errors and save time, money and hassle

Late payments can hurt your cash flow, but with our accounts receivable features, you take control by:

• Consolidating all your invoices in one dashboard

• Sending automated reminders to clients for upcoming and overdue payments

• Accessing instant payouts for unpaid invoices so you don’t have to wait weeks to get paid

Need extra cash to manage your short-term expenses? MimoFlex can help:

• Access working capital when you need it, up to £500,000

• Reduce financial stress by bridging temporary cash flow gaps

• Get flexible repayment options tailored to your business needs

Take control of your cash flow with Mimo

Cash flow management doesn’t have to be overwhelming. By understanding common challenges, implementing smart financial strategies and leveraging tools like Mimo, you can ensure your business stays financially healthy and resilient.

Want to simplify your cash flow management? Get in touch with a member of our team.