How to use technology to improve cash flow

Cash flow is one of the most vital metrics to keep an eye on. Cash lets you settle with your suppliers, meet payroll and grow. However, technology can take this discipline even more empowering.

The father of modern accounting is an Italian monk named Luca Pacioli. In 1494, he first described the system of double-entry bookkeeping. It seems simple now – but back then it was highly innovative.

Pacioli’s innovation aimed to track money coming in and out of a business. It’s perhaps the most basic element of any enterprise: money comes in, money goes out. Managing this ebb and flow is an essential part of running a business.

In these times, managing cash flow is a particular challenge for UK businesses. The Bank of England estimates that companies face an aggregate cash-flow deficit of around £140bn. Unfortunately, it’s common for businesses to have more money going out than coming in.

Luckily, you are much better equipped to deal with this challenge than Pacioli and his abacus. Modern technology gives access to reams of information previously left unobserved. Not only can you be more accurate in your cash flow management, but you can also spend less time doing it.

Why is cash flow important?

In its most basic sense, cash flow refers to the amount of cash being transferred in and out of a company. It’s the cash you have at hand.

Positive cash flow lets you settle debts, reinvest in your business, return money to investors, pay expenses and provide a safety net. Negative cash flow can choke your business.

Many long-term profitable businesses fall foul of day-to-day cash flow issues. You may feel confident about your business position. But inadequate working capital, because of poor cash flow, means there isn’t enough money to fund investments in the here and now.

The cash flow situation for many UK businesses is worrying. A general rule of thumb is that you should have enough cash to cover three to six months' worth of expenses. Almost a quarter of businesses don’t meet this threshold, while a further 21 per cent don’t know their cash position.

Steps to using tech for cash flow management

A good way to improve your cash flow management is by using technology. There are all manner of affordable software that has been designed for small businesses. Through the strategic use of technology, you can simplify and improve your cash flow.

Real-time reporting

When many business owners think of using tech to track cash flow, they think of Excel. The trusty spreadsheet has been a staple of modern commerce. But Excel has long been surpassed by more effective accounting software packages.

Accounting software packages now integrate with your bank account. Your different digital presences can now be seen from one place. Many software packages now include the functionality for invoicing, too.

By invoicing from your software, you simplify and automate credit control. Modern software solutions can send automated email prompts to clients at pre-set milestones. This hurries payment along and gets cash into the business.

If you’re uncertain about how to make full use of your accounting software, your accountant can (or at least should) help you. Many accountants will have specific expertise in whatever software you use.

John Owen uses accounting software Xero to manage cash flow

“All of our accounts run on Xero. We also have a bookkeeper, so we’ll meet up quarterly and draw down a cash flow analysis. Based on what Xero’s showing, we run a profit and loss statement, which is done on an Excel sheet that the co-founders collaborate on.”

John Owen, co-founder of Masterclassing

Cross-company visibility

A critical challenge for business leaders is paying attention to what staff are telling them. And it’s easy to keep things from workers.

Not only is this bad for your mental wellbeing, but it’s also bad for your cash flow. Staff have eyes and ears in places you don’t. As an owner or director, you’re often removed from on-the-ground discussions.

As such, figures and metrics lose context. By offering cross-company visibility, software lets your team add their perspective to the numbers. Modern accounting software enables many users to access the same set of data in the cloud at the same time.

Spotting red flags

In normal times, you want to look at cash flow on a weekly basis. This flags problems faster and earlier than doing this at a monthly interval, when you take a more in-depth look at your company finances. In more difficult trading conditions, you may want to do this daily.

This can be time-consuming if done manually. Luckily there are specific cash flow reporting tools that are either built into accounting software or integrate with it. These tools create cash flow forecasts that are more accurate, up to date and take a fraction of the time compared to using spreadsheets.

The toss-up should never be between your output and managing your numbers. Instead, automation makes cash flow management (and risk management) simpler and faster.

Improving cash flow management

One way to improve cash flow management is by, simply put, getting more money into the business. With more money coming in, cash flow management becomes less of a high-wire act.

Technology can help in all sorts of ways. You can outsource fulfilment to tech-led firms like Amazon. Or you can sell via online marketplaces like Facebook. These avenues can eat into margin per sale – but this could be offset by more volume.

Payment gateways are another aspect to consider. The easier it is for consumers to buy or for suppliers to settle debts, the more cash comes into your company. For example, online tools make it easy for small businesses to set up Direct Debits, which automatically charge customers, rather than waiting for invoices to be settled.

Chase invoices

The other end of the spectrum for cash flow management is good invoice hygiene. Don’t bury your head in the sand; chase late payments and proactively invoice your customers.

Chasing debtors can be extremely time-consuming (and quite awkward). This process can be automated. Invoice chasing software standardises your touchpoints with debtors, most commonly through email templates.

The aim is always to shrink the gap between invoicing and getting paid.

Online payments are the quickest way to get paid, so adding a payment link to your invoices can help. By simplifying the payment process, you’re making it as easy as possible for people to give you money.

Thinking holistically about using technology to manage cash flow

When considering technology’s impact on your cash flow, think holistically. It’s not just about accounting software or automation. Tech can be used to speed up payments, help commercial teams track what’s happening and spot red flags.

Technology is not a cure by itself. Tech is only as good as its user. It’s entirely possible to recreate the silos of real life in the digital realm. And, if your people aren’t grounded or familiar with the systems you’ve put in place, technology’s impact will be limited.

As the American technologist Becky Frankiewicz explained: “The main implication is that when leaders think about investing in technology, they should first think about investing in the people who can make that technology useful.”

Digital transformation is essential. But it’s as essential to consider the thing you aim to transform. Cash flow – as a metric – is the story of how your business operates day-to-day. Begin from the ground up and get your people involved in cash-flow management. Technology will make this process easier.

“It’s all too easy to panic and jump into situations we are totally unfamiliar with, but actually sitting back and taking stock, analysing what tools you really need to do your job in the best way you can and ensuring you are able to communicate easily (but not unnecessarily!) with your team is invaluable.”

Charlotte Evans, associate director of The Double Unit