Top tips for managing business cash flow
Carl Reader, author of The Start Up Coach, co-owner of dennisandturnbull.com and co-founder of yourbeargroup.com
Fundamentally, the reason that most businesses fail comes down to a cash flow problem – whether it is another business failure that leaves them with a bad debt, a change in market conditions that they can’t adapt to quickly enough, or simply their funding being withdrawn; a problem with cash flow can very quickly lead to a business having to close it’s doors.
Because of this risk, it is vital that all businesses take every step possible to ensure that their cash flow is managed effectively. Here are some tips that might seem simple, but will ensure that you manage your finances effectively to maximise your chance of success:
- Invoice your customers promptly – if you do not raise your invoices promptly, you have little chance of getting paid promptly! I have a little rule that I like to apply personally, which is that the value of any work done for a customer goes down for each day that you delay invoicing. What I mean by this is that customers are most enthusiastic about the service or product you provide on the day of purchase. If you then wait two months to invoice them for it, the initial feelings are likely to have disappeared.
- Make sure you invoice everything you can – again, this is another obvious tip, however it surprises me how many businesses I see (in all industries) that do not have a system to ensure that all work done, or all products sold, are actually invoiced. This is perhaps more vital than the first tip – as although a late invoice may get paid, an invoice which is never raised is never paid!
- Make sure you invoice accurately – whilst it is important to ensure that you invoice everything you can, it is also wise not to invoice any more than what you should. Not only is this practice unethical and illegal if done on purpose, it will also give the customer an opportunity to dispute the invoice, which will drag out the length of time before you get payment from them. Therefore it is vital that you ensure that you have an accurate invoicing system which can help you avoid errors on invoices.
- Set appropriate due dates – many businesses seem to default to 30 day terms of payment, however I often find that start-ups adopt these terms with little consideration of the terms that they would like to set. Whilst certain large customers would require you to fit in with their payment policies, it is up to you to determine what your terms of business are. Also, make sure that your accounting system can handle the terms of business that you require, as some software packages can only handle fixed terms of 30 days.
- Follow up your debtors – Once you have raised an invoice, and set a due date, it is important to actually chase the debt! Provided that your system can report on it, make sure that you have a regular report of debtors, and have a fixed follow up process to contact your customers. The best processes tend to include courtesy calls to ensure that the invoices have been received before they are due, a reminder on the due date if not paid by then, followed by a series of escalating letters which ultimately end in a letter before action should you need to take further recovery action. There are several debt collection agencies who can help you at this stage, and often the introduction of a third party is all you need to get payment from your late paying customers. Many business owners get worried about chasing debts, due to a fear of upsetting their customers. Keep in mind that a customer who doesn’t pay you is usually not worth keeping as a customer!
- Use free of charge credit from your suppliers – having extoled the virtues of effective credit control, it is worth remembering that in turn your suppliers will have payment terms, and you are able to use these to your advantage. If a supplier gives you thirty days credit, try to use this credit as part of the overall funding of your business. I am not suggesting that you perpetually pay late, but do make sure that you take advantage of the permitted credit terms. It is however worthwhile reviewing your suppliers terms of business to see if there are any opportunities for early settlement discounts, and indeed consider whether it is worth using these yourself on your own invoices.
- Monitor your bank account regularly – with online banking, there is no excuse for not knowing exactly where your financial position is every single day. Make sure that you also have a projection of how the upcoming days, weeks and months look, even if only a rough calculation, so that you can take action to improve your cash flow position earlier rather than later.
- Keep your financiers up to date – if you do happen to anticipate cash flow difficulties, make sure that you speak to your bankers as early as possible, as they may be able to support you through any difficult times. Your bank has a vested interest in allowing you to continue trading, and provided that you approach them intelligently with a sensible proposal, they would be likely to want to help you through any rough periods with additional facilities. It’s important to avoid burying your head in the sand on these matters, as financial support is very difficult to obtain (and usually expensive!) after the event.
- Stay on top of your tax – this might seem obvious, but it is vital to make sure that you have sufficient provision for both your personal and corporate taxes – see below.
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