Cash Flow Advice

As the old saying goes, ‘Cash is King’. A Bank study revealed that an astonishing 82% of small businesses fail. Poor cash flow is often the cause. Here is a comprehensive guide to avoiding the problem.

Make cash flow part of your business strategy

The well known US businessman Jack Welch one said: “Too often we measure everything and understand nothing. The three most important things you need to measure in a business are customer satisfaction, employee satisfaction and cash flow. If you’re growing customer satisfaction, your global market share is sure to grow, too. Employee satisfaction gets you productivity, quality, pride, and creativity. And cash flow is the pulse — the key vital sign of a company.”

John ‘Jack’ Francis Welch, Jr. was Chairman and CEO of General Electric between 1981 and 2001. During his tenure at GE, the company’s value rose a staggering 4,000%. He knew what he was talking about when it came to building strong robust companies. If he said “Cash-flow is the pulse”, then we had best believe it!

Even when sales are growing rapidly and profits are increasing, it does not follow automatically that cash flow will simply take care of itself. Even growing, profitable companies can get themselves into cash flow problems; increased sales need funding upfront.

Effective cash flow is not something that ‘just happens’. It means putting in place procedures within your business that will have a positive and long-standing effect. If those procedures are followed, you will significantly minimize the risk of getting into financial difficulties. Business owners who think and plan ahead will be safe, rather than sorry.

Here is some detailed cash flow advice for your business.

Make a decision to take action

If your business suffers from fluctuating cashflow, make a decision to do something about it. You are a busy person and it is all too easy to get ‘lost in the battle’, as opposed to seeing the big picture. If your business runs out of money, the stress can be enormous. Everyone will be chasing you, from staff to commercial creditors and of course the tax man.

Keep your records up to date

Accurate accounting records are crucial in order to manage the financial health of your business, throughout the year. Learn how to track your cash flow in a smart way. Technology can help to streamline processes and automate some tasks. Many small business owners decide to outsource business tasks as there are not enough hours in the day to do everything themselves. Outsourcing accounting and financial tasks to the professionals can take a considerable weight off your shoulders.

Spend time planning

Effective cash flow revolves around timing. Specifically, the timing of your sales cycle. In a perfect world, you would be paid on time by all of your customers. This would mean that you have cash available to pay your suppliers when they are due. In the real world, this does not always happen, does it? The Credit Protection Association can help you to encourage payment of your invoices with its unique Overdue Account Recovery System which encourages payment direct to you, whilst maintaining customer goodwill.

However, you will still require a cushion of cash for those times that you don’t have sufficient funds in your account. This can happen for many reasons, for example, when you have a large contract or job on your hands, which you won’t be paid on for quite some time. The amount of money you need will vary. Start by thinking about how much cash you would will need on hand if your largest customer delays  payment by a few weeks. Many businesses ask their Bank for an overdraft facility or emergency funding options to provide them with working capital in the event they come across a temporary financial hurdle. Today, the Banks lend in different ways and they are under their own pressures. If you read your overdraft contract carefully, it will probably say that the Bank can request full repayment of your business overdraft at any time. Hence it is a good idea to have some money set aside.

Do you credit check customers?

Naturally, having made a sale, a business may want to grant credit to a customer without checking anything first, especially if it is a significant sale. Before granting customer credit, it is essential to check the prospective customer’s credit history.  The Credit Protection Association provides its members with credit application forms. This means that they can get the full details for their customer and a promise to adhere to their credit terms.

In addition, we also provide our Status report system, powered by our award winning credit information provider partner. Our system allows SMEs to access this quality information that is normally only available to Banks and Credit Insurers.  Don’t be afraid to refuse credit to someone who doesn’t warrant it. You wouldn’t hand them a pile of cash, would you? So why give them your work which is just as valuable. If they really want your goods or services, then something can be worked out such as breaking up the order into manageable chunks or other payment methods.

Remember that if a new customer does not want to pay up-front, then they may have cashflow or credit problems of their own. By not doing business with people who don’t have the ability to pay you, you are saving cash on fulfilling orders you are not going to be paid for. That is where an advance commercial credit check is hugely worthwhile. Did you know that The Credit Protection Association can provide this service within seconds?

Inadequate spending control

Human nature being what it is, it is very easy to make impulse purchases, especially during the startup phase. Try not to tie up capital in needless expenses. Do you really need that expensive office furniture? Do you need such an expensive car? When there is cash outflow, the reason why the cash is being spent should be clearly defined. It should be linked to the return that will be generated. Implement a policy that requires all expenses and purchase requests to come with a document that requires review and approval by a Director or manager. This will decrease unnecessary purchases. Keep in mind that all expenses are not created equally. If you want your business to make money, use the cash to grow your business and always keep your eye on the bottom line.

Poor inventory management

Optimism is a common trait amongst successful entrepreneurs. After all, a positive view on life is one of the reasons that entrepreneurs take the risk of going into business in the first place. Letting your positive and upbeat nature compromise your objectivity is dangerous to your cash flow. Every potential customer will not make a purchase, so be realistic based on past sales experience. This can help you to predict future sales, so that you don’t manage inventory poorly .

Over-ordering products means you wrap up a considerable amount of cash in inventory that you don’t need. Revenue forecasting is difficult during the first couple years that you’re in business because you have fewer experiences to reflect on. It is important to find a happy medium. If you don’t have enough inventory, you may find yourself unable to fulfill orders or provide the services that your customers want. Figure out how to accurately forecast sales, so that you can ensure you have the right level of inventory throughout the year.

Kill off products that don’t sell

Products have a natural life cycle, just like people do. They are born, they mature and they pass away. Do you have a stockroom that is full of items that rarely sell? Having unsold stock ties up your cash. You don’t want to miss out on a sale because you did not have it in stock, however, can you manage your stock and get rid of products that do not sell, even if you have to sell at a lower price? It can be emotional to give up an unsuccessful line, but trends rarely reverse. Be realistic!

Use discounts

Have you ever considered giving early settlement discounts to your customers? Everyone likes to make a saving, don’t they? This is especially true if it means that more money stays in our wallets and purses. This is a good way of encouraging people to pay early. If you offer customers a discount for early payment you will quickly see the cash rolling in.

Don’t purchase – lease

It is true that leasing usually ends up being more expensive than buying in the long run. However, unless a company is flush with cash, coming up with the cash for big capital expenditure can cause stress. By leasing, you pay in small increments, which helps improve cashflow. A bonus is that lease payments are a business expense, and thereby can often be written off.

Make daily electronic payments

Do you produce a monthly payment run for all of your suppliers at the end of the month? If you do, you will probably pay some of them earlier than they asked to be paid. Consider holding off payment until just before it is due. Set up electronic payments for all suppliers so that they only receive the money when it is due. By the way, don’t resort to paying suppliers late, you want to maintain a good business relationship. However, there is no need to pay them early, either.

Send out your invoices immediately

We know that you are busy, however, the longer that you wait to raise an invoice, the longer that it will be before payment is due. That means it will be longer before you get paid and it means that your customer is using their finite cash to pay someone else first. Get the invoice out and get your cash in! Why not send the invoice by email to the person responsible for payment. There is then no doubt that it has been received.

When was the last time that you increased your prices?

Increasing your prices can be scary. You may worry that it will hit your turnover. Can you experiment with pricing to find the perfect number? How high are customers willing to go? There’s no way to find out, unless you try.

Do you have a process for payments that are overdue?

It is a fact of life that customers who do not pay have always existed. They will always exist. That is why you should always be prepared for these situations. Have procedures written down to follow when late payments happen. Start with a polite phone call or an email. Have a procedure to send a reminder a week later.

Have a fixed point when you will pass it to a third party for collection. You do not want to be aggressive and scare off customers, however it can be equally damaging to be a walkover. By being passive and waiting quietly for a payment, the situation can keep happening over and over again. This is because the other person may think there is nothing wrong with being late a few days or even a few weeks. It is best not to assume that everything will eventually sort itself out and your customer will do the right thing all on their own. It rarely ever happens! The Credit Protection Association’s overdue account recovery service is an excellent tool to help prompt payment.

Keep monitoring your debtors

Just because a customer has always paid on time in the past, do not assume that they will always do so. Continually monitor debtors to see if there is any change in their circumstances. The Credit Protection Association service provides the facility to monitor customers at the click of a button. You will receive an email if anything changes.

Regularly review the outstanding balances owed to you. We cannot overemphasise how important it is to produce regular reports regarding the financial situation of your business. It helps if you take action immediately and minimise any risks that can have adverse effect on your business.

Create a cash flow forecast

It is essential that you create a cash flow forecast. Map your expected payments out and payments in and review this regularly. Set a critical barrier for your cash levels and make sure that you are alerted when your cash levels break that barrier. You should delegate the task to someone else within your business if possible.

Make it easy to pay you

Make it easy for your customers to pay you and give them options to pay. Provide them with your bank details so that they can make electronic payments. Or take payments by credit card. Can you set up direct debit facilities? Automating the process not only makes it easier and frees up time, it will also make your cash flow more predictable.

Don’t be a late payer

Don’t be a late payer yourself. Not only will it reflect badly on your company, you could incur unexpected costs and charges. Become a supporter of payontime.co.uk and work with other companies who have agreed to pay on time.

Review your contractual terms

Ensure that your contractual position with clients are clear from the start. Make sure you credit check new customers, as previously discussed. You want customers who will pay you and that know they have to pay you when expected. The essence of a good contractual relationship is that both sides have certainty.

Free up cash flow on your balance sheet

Look at the cash tied up in stock and see if you can rationalise your stock. Do you have money tied up in unpaid invoices? The Credit Protection Association offers a credit management system that encourages prompt payment and reduces the amount of capital you have tied up in unpaid invoices. Nobody disputes that collecting debts is hard. It is easy to put barriers in the way of asking for money.

Conclusion

Managing your business’s cash flow effectively is one of the most important parts of growing a successful and strong business. No matter how great your business model may be or how profitable you are, inadequate cash flow can be fatal for your business. If you manage your money accurately and improve your liquidity, then your business will have a much greater chance of surviving and flourishing in the years ahead.

Healthy cash flow is the result of putting in sound procedures so that your company’s cash flow runs efficiently and smoothly. Hopefully the above suggestions regarding cash flow advice will help your business.

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