Are you growing rapidly without sufficient reserves to support your expansion? Or struggling with your late-paying customers? Use this 5 step guide to identify cash flow problems potentially afflicting your company and discover how to put them right.
1. Map out your business’s future
Put together a realistic forecast of your business’s cash flow in the months ahead. This should include salaries, rent, energy bills, raw materials and marketing activities as well as expected revenues and when they will occur.
It’s worth modelling a number of different scenarios in order to test your company’s resilience.
You could face challenges if:
• You have a salary run or several large bills that are due to be paid before you expect to receive payment for a particularly large order.
• Your more pessimistic models show that if any of your major customers pay late, you will have difficulty settling your own bills on time.
• Your suppliers’ credit terms specify tighter timeframes than the terms you offer to customers – this will mean you’re committed to paying out cash faster than it’s coming in.
• Your models suggest there is little room for error, because there is no spare cash in the business to fall back on.
Don’t panic if your forecasts flag up one or more of these problems – identifying issues ahead of time is the whole point in doing this work.
2. Get to grips with the paperwork
Making sure your business is organised effectively can have a surprisingly significant effect on your cash flow. Don’t let delay and disorganisation cause you unnecessary problems.
• Issue your invoices as soon as you possibly can; the sooner you get them out, the sooner you’ll receive payment.
• Make sure there are clear processes in place for ensuring that invoices are generated as soon as work is completed.
• Specify your company’s payment terms clearly and be prepared to chase immediately if there’s a delay.
• Encourage customers to pay bills electronically – through the BACS system, for example – wherever possible.
• If you do have to take cash or cheque payments, make sure you get money into the bank as soon as possible.
• Consider taking on additional staff or hiring the services of a book-keeper if paperwork is taking up too much of your valuable time. Software packages specially designed to help SMEs with invoicing and payments can also save time.
• If you do not want the cost and responsibility of additional head count internally, consider using the expertise of a third party credit control.
3. Know your customers
The speed with which customers settle your bills – and whether they actually do – will make all the difference to your cash flow, so it’s really important that you do your homework on them. This is particularly important with larger customers whose behaviours could have a material impact on your company.
Consider carrying out credit checks on new customers – and getting regular updates on existing ones as these may alert you to serious problems.
Use your own record keeping to analyse your customer base. Separate out regular customers into those that usually pay early, those that pay on time and those that often pay late.
Work hard at getting more business from customers you don’t have to chase for payment.
Speak to valuable but late paying customers about how you can encourage them to pay more promptly.
Consider ceasing trade with companies where your analysis has flagged up a late payment problem.
4. Manage growth carefully
Most business owners have ambitious plans to grow their companies, but when growth is more rapid than expected or planned, the effect on cash flow can be hard-hitting.
• Make sure your cash flow forecasts include an assessment of the impact of sales growing more quickly than anticipated.
• Talk to your bank about extending any existing facilities – but be wary of paying for additional funding that may not be needed after all.
• Use invoice finance, where your outstanding invoices are used as an asset against which you can borrow money. An invoice finance firm will advance cash of up to 90% of the value of the invoice as soon as it is raised which is then repaid once the invoice is settled. The responsibility for chasing payment can also be passed over to the lender for an extra cost. As the facility rises and falls in line with turnover, you only ever pay for what you borrow.
5. Focus on the business
The key to success is making sure your business is built on strong foundations that you review regularly – that way, you can devote your energies to making it as successful as possible.
• Monitor the balance between business growth and cash flow management carefully: with good modelling in place and a contingency plan for dealing with any challenges, your business should be able to ride out volatile market conditions such as those we now face following the Brexit vote.
Generate a forecast of your business’s short to mid-term cash flow to make sure you are aware of any imbalances where overheads are significantly higher than income.
Refine your processes to keep on top of credit control. Disorganisation and a lack of documentation could have a significant impact on your cash flow.
Carry out regular credit checks on new and existing customers and analyse payment patterns of your existing customer base. This will enable you to avoid cash flow worries and make informed decisions about who you wish to work with.
Ensure your business is built on strong financial foundations that you review regularly to enable your business to thrive and grow sustainably.