How SMEs can improve cash flow
By Jack Seymour is Business Development Manager at Pinnacle Business Finance,
The UK’s SMEs account for over 99% of all businesses, and yet over a third of SME owners experiencing late payments claim they have to rely on overdrafts to help meet their monthly obligations.
Clearly cash flow among small to medium enterprises was a serious issue even before the effects of the coronavirus pandemic hit. In order to survive, it’s now more important than ever to address your cash flow.
Review your payment terms
Prevention is better than cure, so before you act on any frustrations about late payments, check first that your own payment terms are as clear as possible. Check that the wording or terminology isn’t ambiguous, and even more importantly, make any new clients aware of them. Having a link to them in the bottom of an email, or hidden in the terms and conditions on your website isn’t enough; make an effort to communicate your terms to prospects and clients verbally so that everyone knows where they stand, and no party is entering a situation they can’t realistically follow through on.
It also pays (quite literally), to be flexible with payment type. The easier you make it for your clients to pay you on time, the more they’ll do it!
Maintain healthy relationships with your suppliers and clients
This has two benefits. If you have a strong relationship with those paying you, they are more likely to pay you on time, and more likely to treat you with the respect you deserve. They understand that you provide a good service, and knowing you on a personal level makes it harder for them to mess you around. It also means that if they’re ever in a situation whereby they simply can’t meet a payment, if you’ve cultivated an open and honest relationship with them thus far, they’re more likely to be upfront about their problems and let you know in advance.
Having a good relationship with your suppliers is also key. Pay other people on time as you would expect to be, and if an unfortunate situation did arrive where you needed to be flexible, it’s likely they’d be more understanding.
Track and forecast your payments
Probably the simplest rule going regarding cash flow, but also the most important. If you don’t have a clear view on incoming and outgoing payments, you can never be confident of cash flow, plus visibility of your accounts gives you an opportunity to streamline.
Whether you outsource this, invest in accounting software, or simply keep your own databases in check, real-time information on outgoings and incomings, along with information on how owes you money and how long they usually take to pay, is crucial. It also helps you be more upfront with your own suppliers about when payments will be made.
Incentivise early payments
Creating incentives for early or prompt payments is a good way of encouraging a larger percentage of your payers to pay on time. This could include a discount for those who pay early, or a complimentary service or product at the end of the year for those who consistently met all payment deadlines. Not only does this improve cash flow, it also helps you retain your best customers. These are the people you want more of as a small business owner!
It’s so important to tread the right balance when negotiating with your clients. There’s a fine line between chasing payments you’re rightfully owed, and alienating customers. At the end of the day you’re better off with a late payment once or twice, than losing a client or customer for good.
Yes, you’re a business owner, but you’re also a person, dealing with another person, who may have cash flow issues as well, through no fault of their own. Never deal with late payments when you’re angry and frustrated. Instead, take time to cool down and speak to people calmly and openly. There’s an art to knowing how and when to nudge a customer for payments.
This is where a finance manager can be especially useful – it allows you to protect your relationship with your clients and customers, by having someone else have these separate conversations with them.
It can be a tough world out there for SMEs right now, but if you’re looking to prioritise anything, it should be cash flow. And it can be manageable, as long as you’re organised, flexible, and tackle it head on.