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How to improve cash flow for trade businesses

Cash flow is at the heart of trade businesses both large and small. In this article, we look at methods to improve cash flow that can help you grow your profits. Regardless of your technical skill, it is always good to focus on business skills too.

What keeps tradespeople awake at night? Worrying about getting paid on time and settling your bills is probably a contender.

Often, it all comes down to cash flow. Poor cash flow can quickly bring down even a successful business.

Keep in control

It doesn’t matter whether you’re a small or large trade business. A sole trader or employer with a big payroll. Cash flow keeps you in business.

There are plenty of methods for improving cash flow. It’s especially important for trade businesses of all sizes.

Why improving cash flow is important

Improving cash flow not only helps day-to-day financial management. With good cash flow, you can plan for payments you know are coming up.

If you’re a larger trade business, that can mean regular monthly wage payments. Then there are annual tax bills.

Income tax and corporation tax for limited companies have set payment dates. And you’ll be fined for late payments.

What is cash flow?

Cash flow measures the movement of money in a business. If more is flowing in, that’s great. It means you can do things like grow your business.

A lack of available funds, perhaps if too much money is flowing out, can be extremely frustrating.

That’s why it’s essential you get to grips with managing your cash flow.

How can a business improve its cash flow?

Every aspect of your business revolves around money coming in or going out. Finding methods of improving cash flow that best suits your business can boost your profitability.

Success as a tradesperson is not just in the quality of your work.

Make sure you can keep a good volume of work coming through. And don’t forget to keep an eye on your small business cash flow.

Small business compliance

Where does business cash come from?

For trade businesses of all sizes, cash usually means money coming in from the jobs you do. Cash can also come from other sources.

If your business has investments that pay dividends that can bring in cash. Or if you earn interest from money held in bank deposit accounts.

It can also come from selling business assets, such as selling a company vehicle in order to upgrade.

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Is positive cash flow the same as profit?

Quite simply, no. Cash flow is only a way of recording the movement of money.

Your business could be making a loss even if it has a positive cash flow. For example, a bank loan boosts your cash flow with extra funds but not your profit.

A tradesperson’s profit is what’s left after deducting your expenses from your revenue. Business expenses can include things you don’t actually pay for, like the depreciation of assets.

How often should I check my cash flow?

Take your cash flow pulse as frequently as you need. Monthly is usual, but daily might be better, especially if you are trying to improve your cash flow.

Online banking apps and cash flow software can also help your trade business. They give you a real-time picture of your cash flow.

What cash flow says about your business

As you’d expect, a strong cash flow is a sign of a healthy business. It means you have funds available to finance your growth. The more you grow, the more cash should come in and the more you can expand.

Build your business reputation

But a strong cash flow needs to be managed carefully. If you spend too much on growing your business you could overspend. Cash flow could quickly turn negative before new business comes in to bolster your bank account.

Cash flow information provides tradespeople with an important financial statement. It is also used by others, like banks, if you are looking for a loan to finance your growth.

10 tips to improve cash flow

We’ve put together a list of 10 methods of improving cash flow. Putting some or all of these into action will benefit your business.

1. Make sure customers pay you on time

Let’s start with this bedrock of improving cash flow. It’s not always easy to chase customers for payment, but it’s certainly worth the effort.

Here are some ideas to help you:

  • Always invoice customers as soon as a job is complete – the quicker you do, the sooner you should be paid
  • Set out your payment terms clearly
  • Encourage early payment, such as half up front – especially if you buy materials before starting
  • Think about letting customers pay in instalments
  • Offering customers discounts for prompt payment – you may receive less, but you receive payment faster, helping improve cash flow
  • Consider conducting credit checks on customers – this could help you avoid bad debts from unpaid bills

2. Decide when to pay suppliers

Most suppliers set payment terms. These say how long you have to pay them. You’ll need to settle your bills on time or they might refuse your business in future.

That said, suppliers are usually flexible on this. It’s always worth negotiating terms that better suit your cash flow.

Also, always check whether suppliers offer payments on account. For example, where you settle your outstanding balance owing at the end of each month.

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3. Cut your running costs

You’ll find plenty of ways of reducing business expenses if you look at them closely. Here are some ways:

  • Remove unnecessary expenses, such as reducing waste by being more efficient with materials
  • Cut overheads and running costs, for example, by using less electricity for lighting or cutting water consumption
  • Drive more efficiently reduces fuel bills and extends the life of vehicles

4. Think about your staffing levels

Larger and enterprise trade businesses will have a workforce that needs paying on time. Think about improving your cash flow by changing when they work.

Ideas like flexible working and work rotas help spread staff costs over a set period. Similarly, if you pay staff commission or business think about restructuring these to support your cash flow.

For example, link bonus payments to when large jobs get paid.

5. Raise your prices

Another area ripe for improving cash flow is your pricing structure. Even larger trade businesses can find they haven’t updated their prices in years.

Review your prices regularly. If your business costs rise with higher prices and energy costs, consider charging these extras to your customers.

Negative cash flow

A sure sign your pricing doesn’t match your costs is having a negative cash flow. here, outgoings exceed money coming in.

Other price-rising ideas are looking at your markup on materials and profit margin to see if they need adjusting.

building materials

6. Keep an eye on your stock

Stock represents money tied up in your business. You want to keep the right quantities for your jobs. Not too much, not too little.

Try these ideas:

  • ‘Just in time’ stock replenishment is when you buy stock only when you need it
  • Check stock delivery times so you avoid expensive last-minute purchases
  • Buy in bulk at lower prices, so long as you know you’ll use it all

7. Look at your equipment and vehicles

Vehicles and equipment are big purchases for any trade business. Keeping them going can also be expensive.

Capital expenditures for assets like equipment, tools and vehicles can drain on cash flow.

Think about spreading the cost of ‘big ticket’ items over several years by leasing assets. Hire purchase is another way to avoid making large up-front payments.

8. Think about invoice factoring

Many trade businesses, both large and small, get someone else to do the hard work of chasing customer payments. It’s called invoice factoring.

Here, you:

  • Sell your unpaid sales invoices to a company that collects the money
  • Receive money due on your invoices directly from the factoring company (they will charge commission)
  • Avoid the hassle of chasing payments

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9. Carry out cash flow forecasting

It’s nice having a crystal ball to plan ahead with your business finances. One way you do this is through cash flow forecasting.

Forecasting means you make a plan for months when you receive less income. It helps you save for those larger, regular payments.

Write down:

  • When you expect to receive money
  • When you have to pay bills
  • Sales trends, like being busier with seasonal work

10. Put spare cash into interest-earning accounts

By improving cash flow you’ll hopefully save money. Think about where surplus money will work hardest for you.

One of the easiest places is a business savings or reserve account. That way, your surplus cash will earn interest for your business.

Other ideas for improving your business cash flow

There are plenty of other ways of improving your cash flow. Often that could be as simple as finding more work. Need help getting more leads? Let us help with that.

Checkatrade members receive our help with new enquiries. Both the tools and lead generation that you need. But, there are lots of other benefits of Checkatrade membership too.

They include:

  • Dedicated membership advice team
  • Work guarantee up to £1,000
  • Exclusive offers and discounts
  • Up to 20% off Public Liability Insurance
  • Reduced cost of workwear and branding
  • Savings on other business essentials such as vans, fuel and materials

Key takeaways

  • Trade businesses of all sizes benefit from improving cash flow
  • Improving cash flow helps day-to-day management and also planning for larger payments
  • Positive cash flow is not the same as being profitable. A business that’s making losses can have a positive cash flow
  • Check your cash flow regularly, so you can respond quickly to changing situations if you need
  • Getting your customers to pay you on time is fundamental for improving cash flow

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DISCLAIMER
This is information – not financial advice or recommendation. The content and materials featured or linked to on this blog are for your information and education only and are not intended to address your particular personal requirements. The information does not constitute financial advice or recommendation and should not be considered as such. Checkatrade website is not regulated by the Financial Conduct Authority (FCA), its authors are not financial advisors, and it is therefore not authorised to offer financial advice.
Always do your own research and seek independent financial advice when required. Any arrangement made between you and any third party named or linked to from the site is at your sole risk and responsibility. Checkatrade blog and its associated writers assume no liability for your actions.

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