Cash is King - the importance of good cashflow
There is so much uncertainty surrounding the business market at present both politically economically and this is impacting on how businesses are choosing to operate. Inevitably it brings managing cash flow into focus. Companies looking only at their earnings and not managing cash flow will find it difficult to continue trading in today’s economy and will need the support of flexible financing to ensure the future success of their business.
“Cash is king” is an expression often used today. We all understand how vital good cashflow is to the smooth running of any business. Despite this firms continually come up against cashflow challenges. One key area is dealing with the issue of late payment. Recent figures from Bacs Payment Schemes (Bacs) found that small businesses in the UK are spending a staggering £2.16 billion to chase overdue invoice payments. We all know the Government has been supporting the fight against late payment in recent years with the introduction of various pieces of legislation and this does appear to be having an impact with late payment debt halved from five years ago to £14.2 billion.
However, this is still a sizeable debt and if not managed correctly it can lead to the failure of a business. Pulse Cashflow have provided some key areas to focus on to ensure a healthy supply of cashflow and to protect a business’s financial health:
1. Cashflow over profit!
Cash is King and if a business doesn’t have sufficient cashflow it could fail. Many start-up businesses develop income and profit forecasts to get a business off the ground but not enough businesses create ongoing cashflow forecasts. They should prepare and maintaining a cashflow forecast which can be updated weekly, to provide an accurate outlook for the next six to 12 months. Setting targets for the credit controllers is an excellent way to ensure it is given the attention necessary and provides a level of satisfaction and ownership to hit and beat these.
2. Dedicate someone to manage cashflow
It’s important to understand the business’s cashflow position. Having a member of the team whose responsibility it is to track monies coming in and monies going out is vital. Managing cashflow can be an unpredictable task so ensuring the cashflow position is clear and whether there is sufficient funds in the bank is required. Any issues should be raised and discussed with a plan of action put in place immediately.
3. Agree clear payment terms
Establishing clear payment terms from the outset is important. If you don't start off knowing what your payment terms are, it is difficult to know when you are going to get paid. If you don't know when a payment is overdue, you can’t manage cashflow. In our view 30-day credit terms are the norm. Your employees need paying in 30 days and your suppliers also need paying in that time.
4. Invoice quickly
Invoice clients as soon as the work is completed and consider using email for faster and easily trackable delivery of that invoice. Always follow up the invoice with a courtesy call to check the invoice has been received and that there are no issues with it and therefore it’s payment. Clearing up any invoice queries early on reduces the potential of issues arising later.
5. Make customer payments easy
Make sure invoice carries the name of the person it needs to go to so that it doesn’t get lost in the customers business. Ensuring the invoice carries full payment details - bank account sort code and account numbers – to make it easy for customers to pay. Make sure the agreed credit terms are clearly stated on the invoice as well as the date when payment is due.
6. Encourage Customers to Pay Faster
Offering customers early payment discounts can encourage customers to pay their invoices early. For this to work effectively, standard credit terms need to be in place. Profit margins may be impacted but this is balanced against the availability of cash to invest in the business.
7. Extend supplier credit
In contrast, negotiate the best credit terms with suppliers. If you can achieve 60 or 90 days this can give you instant credit. Some suppliers charge late fees, however, so make sure you pay on time.
8. Keep the bank informed
Keeping your bank informed of what is going on in your business including any unforeseen outgoings and changes in forecasts, is crucial so that there are no surprises. Speaking regularly to your bank contact ensures a healthy relationship. Your bank should be used as a financial support to your business but also as a source of information regarding an array of financial solutions that could support your business more effectively.
9. Review financing arrangements
Review how the business is managed can reveal ineffective financing arrangements. There are many alternative sources of finance outside of the traditional bank overdrafts and loans. Invoice Finance and asset based finance can provide increased levels of cashflow into the business.
10. Cut costs or improve revenue
A business should always be looking for ways to cut costs or improve revenue. If something or someone doesn’t save money or boost income, do something about it. Review your suppliers, phase out products or service lines that don’t fully contribute, stop doing business with customers who you don’t make money on and bite the bullet with difficult or unproductive team members.