For small and medium-sized enterprises (SMEs), managing day-to-day finances and cash flow remains one of their most significant and challenging tasks. While many business owners focus primarily on increasing sales and expanding their operations, that’s fundamentally impossible without effective cash flow management and tax planning.
At Hamlyns, we’ve witnessed firsthand how difficult these processes can be, but also how, when successful, they can help a business thrive.
This guide explores how to grow your small business with the help of effective cash flow improvements and proactive tax planning, to strengthen your short- and long-term financial position.
Cash Flow Challenges for SMEs
Research suggests that poor cash flow management is directly proportional to business failures. However, the fundamental issue with cash flow isn’t always about maintaining profitability; many businesses fail because the cash simply isn’t available when they need it the most.
It’s essential to distinguish the differences between cash flow and profit:
- Profit represents the financial gain after all expenses are deducted from gross revenue
- Cash flow is the actual money moving in and out of your business that’s deemed available to meet immediate obligations
A business can appear profitable on its accounts while simultaneously facing a cash crisis if customer payments are delayed or if too much capital is tied up in equipment, stock, payroll, or other immediate expenses.
How to Manage Cash Flow
-
Accurate Cash Flow Forecasts
Effective cash flow forecasting enables you to anticipate potential shortfalls and adjust your plans accordingly. Your business accountant can develop:
- Short-term forecasts (13-week rolling forecasts) for immediate needs
- Mid-term projections (12-18 months) for strategic decision-making
- Scenario planning to model varying conditions based on demand
Regular and decisive cash flow forecasting helps SME business owners identify seasonal patterns, plan for major expenses, and ensure sufficient reserves to make critical payments and meet tax obligations.
-
Accounts Receivable (A/R) Management
Nowadays many buyers appreciate flexible invoice payment terms, but late payments can cripple a supplier’s cash flow. If a business’s cash flow is stifled, it leaves them in a volatile position until the invoice is settled.
Consider these strategies:
- Establish and communicate clear payment terms upfront (ideally of 30 days or under)
- Use professional, detailed invoices with clear instructions
- Offer multiple payment options (bank transfers, direct debits, online platforms, etc.)
- Implement systems to send automated payment reminders before and after due dates
- Consider offering discounts or incentives for early payments
-
Accounts Payable (A/P) Management
As you improve your A/R processes, consider how you can better manage your outgoing payments. Consider:
- Negotiating extended payment terms with your own suppliers, aligning payment schedules to suit your cash inflow
- Prioritising payments, such as payroll, HMRC tax payments and key supplier invoices, before considering other obligations
- Batching your payments to reduce banking fees and improve overall administrative productivity
- Taking advantage of any early payment incentives when cash flow permits
-
Build Healthy Cash Reserves
Maintaining adequate cash reserves provides security and flexibility. Aim to maintain 6 months of operating expenses in reserves, and build additional reserves to maintain stability during slower trading periods. Maintaining sufficient funds can also allow you to capitalise on opportunities when they present themselves, even if you’re in a financially testing lull period.
How to Maximise Tax Efficiency for SME Business Growth
Proactive and effective SME tax planning can significantly improve your cash position and provide funds for healthy and sustainable business growth.
Key UK SME Tax Reliefs and Allowances
Annual Investment Allowance (AIA)
The AIA allows businesses to deduct the full cost of qualifying plant and machinery from taxable profits in the year of purchase. This relief can provide substantial tax savings when investing in computer hardware, manufacturing equipment, commercial vehicles, office furniture and similar assets.
Research and Development (R&D) Tax Credits
If your business invests in innovation, R&D tax credits can provide significant financial benefits. Whether taking advantage of either the SME scheme or the RDEC scheme, the savings and credits can be invaluable.
R&D activities can include developing new products, improving existing processes, and much more. Make sure you carefully consider your qualifying criteria before applying for an SME R&D tax credit scheme.
Small Business Rate Relief
This relief can substantially reduce or eliminate business rates for eligible properties. This can provide either 100% relief for properties with rateable values up to £12,000, or tapered relief for properties with rateable values between £12,001 and £15,000.
Corporation Tax Planning
For limited companies, strategic corporation tax planning can also improve cash flow. Be mindful of:
- Expense timing: Accelerate deductible expenses into the current tax year where beneficial
- Capital vs. revenue expenditure: Understand the tax implications of different types of spending
- Dividend planning: Balance salary and dividend payments to optimise tax efficiency
UK Government Support Schemes and Funding Options
The UK government offers various schemes to support SME growth (including but not limited to):
- UK Innovate Grants – for businesses developing innovative products or services
- Export Support – for businesses looking to expand internationally
- Regional Growth Funds – LEPs (local enterprise partnerships) and regional development support
Integrating Tax and Cash Flow Planning
The most successful SMEs align their tax planning with cash flow management, ensuring that they are maximising their financial position while meeting all their required tax obligations.
- Set aside monthly funds for tax obligations rather than delaying them into large quarterly or annual bills. Reserve 19-25% of profits for corporation tax, maintain separate cash reserves to meet VAT obligations, and ensure PAYE payroll taxes are ring-fenced.
- Coordinate significant business purchases and investments with year-end tax planning. Make capital expenditures before financial year-end to maximise your available reliefs.
- Work with an experienced accountant and business advisor who can help you unlock opportunities that you might not see straight away. They can provide professional insights into optimising your working capital, identify new and emerging relief opportunities and provide long-term financial planning assistance to support your growth objectives.
How Hamlyns Can Support Your Growth
At Hamlyns, we understand that every SME faces unique challenges and opportunities. Our comprehensive approach to supporting business growth includes cash flow forecasting and analysis, tax planning and compliance, grant and funding support and tailored business advisory services, among others.
If you’re ready to take your SME’s financial management to the next level, the team at Hamlyns is here to help. Contact us today to discuss how we can tailor these strategies to your specific business needs and growth plans.
