There are two fundamental goals at the heart of improving your cash flow: controlling your expenditure and regulating your income. To that end, there’s a raft of clever tactics and useful services that can help smooth out peaks and troughs:
1. Chart of accounts
It may sound dull but the first step to good cash flow management is to understand the flow of money through your business. For that, you need accurate and up-to-date information. Whatever your size of business, you should be routinely receiving a regular stream of data about your numbers – debtor books, budgets and cash flow forecasts should be at your fingertips.
If you are not currently using one, you should consider investing in an accounting software package which will provide this information on a real-time basis.
2. Combat seasonality by diversifying
All businesses have fluctuating levels of income and expenditure, which can play havoc with cash flow if not properly managed. For businesses where demand for goods and services is affected by seasonality, this often means they face their greatest costs during their quietest period. And it’s not just Christmas cracker makers or Easter egg producers that are affected by annual highs and lows.
However, any move to diversify should be carefully planned so that it compliments rather than dilutes the business model.
3. Establish debt chasing procedures
Credit control and debt recovery are vital pillars of good cash flow management. PricewaterhouseCoopers (PwC) research indicates that nearly one in five companies regard current debt levels as the ‘biggest threat’ to survival. Julian Roberts, director of PwC’s receivables management group, urges, ‘It’s a good idea to establish a structure to the debt chasing procedure.’ He recommends that follow-up calls take place after a certain interval, invoices are re-issued a limited number of times and if that fails, a more serious course of action kicks in. The longer a debt remains unpaid the harder it becomes to collect.
‘If your customers are on 30-day payment terms, someone has to call on day 31 and ask where the payment is if it hasn’t arrived. If you don’t do that, you immediately weaken your position,’ says Jeff Macklin, co-author of Finance on a Beermat.
4. Understand customers payment cycles
Many of your clients will have set dates in the month when they pay invoices, so it’s a good idea to incorporate that into your credit control system. Otherwise, if you miss a customer’s cheque run you might have to wait another month and that directly affects your cash flow.
5. Negotiate payment plans with customers
Now you understand your customers thoroughly, try and negotiate an early payment plan if possible as this will increase your cash flow as you will be receiving your payments earlier than expected. You can always think of offering incentives, ie if a bill is clear straight away you could give a discount. Find ways of encouraging your clients to pay early as you know them better than anyone else, it’s okay to be cheeky sometimes.
6. Invoice accurately
Research from PwC finds that around 85 per cent of the reasons given for non-payment by business customers relate to invoice queries or poor administration. It’s essential to get the basics right, such as invoicing the right amount and sending it to the right place.
7. Use a third party to collect your debts
If all else fails and your cash flow is suffering as a result of large quantities of cash tied up as unpaid debt on your books, consider outsourcing the work to a collection agency. Although they have a mixed reputation, figures from the Credit Services Association (CSA) trade body indicate that its members recover up to £5 billion each year. ‘Don’t pick a collection agency randomly from the Yellow Pages. Only use one you know yourself or one recommended to you,’ advises Macklin.
7. Customer credit history
It’s a good idea to credit check customers in advance and continue to monitor their payment practices throughout your business relationship. One way is to purchase status reports from credit agencies. These include full customer details and financial results along with the payment experience of other suppliers, county court judgments and a recommended credit rating. Ultimately, PwC’s Roberts urges businesses not to throw good money after bad. ‘If they’re a good purchaser but a bad payer you have to think about whether you want to continue dealing with them.’
8. Establish good relationships with suppliers
Never underestimate the power of human relationships. Cash flow can benefit from good working relationships and is especially beneficial if there are any issues down the line. And yet again negotiate good payment plans with a supplier, establish a good working relationship from day one and eventually you will be in a position to negotiate for a credit account. This will help you with your cash flow as you will be paying for your costs, potentially a month after you have had the products. People can be understanding when the time comes, so never be shy to discuss things with your supplier which will benefit your business and theirs, the more you grow ,the more work they will be getting from you.
9. Review your payroll system
It’s worth taking some time to find the best payroll solution for your kind of business. the two main options to explore are:
- New payroll software – particularly cloud-based software that will offer features such as automated payslip production, giving online access to your team, salary reports, and regular updates on legal compliance issues
- Outsourcing the payroll function – a chance to bring in a bookkeeper or a contract to a focused group of experts that may be able to identify cost savings you had not thought of
Any improvements on your current system could lead to a significant easing of cash crunch situations as the result of regular payroll pay cycles.
10. Clear terms and conditions
If an agreement to terms and conditions forms part of the grounds on which any deal is struck, it avoids misunderstandings and strengthens your ability to collect any outstanding amount later on. Macklin says, ‘Make it clear that you’re not just selling something, you’re also agreeing with the buyer what and when he’s going to pay for it.’
11. Cut costs and spread payments
Put simply, you can improve your cash flow by not purchasing items unless they are business critical and you can spread the payment rather than taking a lump sum out of your cash flow. Hire purchase and leasing can be used to fund a range of items these days, including new and used cars, light commercial and heavy goods vehicles, plant and machinery, office furniture and computer equipment.
You should also take the time to review every other aspect of your supply chain to ensure you are receiving best value.
12. Contra your goods and services
For many businesses, product inventory increases while cash flow decreases, but bartering gives you the opportunity to turn your spare capacity or inventory into value by giving your business purchasing power when you need it.
13. Invest in your own business
By boosting the skills, productivity and promotion of your business, your own cash flow will benefit. This will help in streamlining the way things will work effectively, though you will be spending on investing on a skill, you will actually be improving the way things are done. Consequently, this will mean either less time used or alternative methods of doing things introduced which will quicken the process of work being done. Whether it’s a more efficient workflow or a better marketing strategy, reducing costs and increasing profits is an ultimate goal. Investing in your own business is a sure fire way to improve cash flow not to be overlooked.
14. Review your customer base
A critical look at your customer base could pay dividends. If you are dependent on a number of large customers who demand longer payment terms (and lower prices) because of their purchasing power, taking steps to refocus your business on smaller customers – who are typically better payers- will help avoid cash flow problems in the future.
15. Invoice financing
An alternative method of managing cash-flow would be to take out an invoice financing facility. Although there are costs associated with this (fees and interest charges), the ability to draw down cash immediately against future invoice payments will give you more control and flexibility in managing your financial position.
Note: We would like to thank Adam Schallamach, SME growth advisor with national network Business Doctors, and Mariah Tompkins, founder of WKM Accountancy Services, for their expert additions to this article.
Further resources on improving cash flow for SMEs
- Here’s how you use free software to manage cash flow – Looking at some free apps for tablets and smartphones which could help you manage cash flow efficiently.
- Cashflow forecast template – From ACCA, with an associated guide offering easy to understand explanations of how a cashflow template works and how you can amend the template to suit your own business type.
- How to optimise cash flow with cashless payments – For businesses that take payment at point of sale.
- The essential guide to managing small business cash flow – A guide we created in association with Fleximize.
Are you a start-up? The following video offers some great advice on how to manage cashflow as a new business