Helpful hints to control credit and cash flow in small businesses
Posted in The virtual assistant blog
One of the most important business administration tasks for many of our small business clients is cash flow management; an ongoing forecast of future cash requirements and small business expenses to avoid any short falls and maintain positive cash flow.
It is important to remember that being in profit does not mean you have good cash flow. Profit is made up of cash, stock and accounts receivable (money owed to the company for agreed sales) and therefore unless you have robust incomes and expenses tracking procedures you can find yourself with cash flow shortages.
In this blog we will share some helpful hints to control credit and help you keep track of money coming in and out of your business.
Cash flow management is all about forecasting: Plan your cash requirements for the long term, and then adjust the forecast for the shorter term (the next quarter or even the next week) as you gain further insight. This forecast will also enable you to set targets for your credit control service or function.
Take in to account your creditors’ terms: External suppliers will likely agree to payment terms somewhere between 30-60 days, however contractors and employees will need to be paid sooner.
Look at your own credit terms: How do they compare to that of others in your industry – are they longer or shorter? If they are much longer you may wish to consider shortening them to match the industry standard.
Consider new client credit policies: When you are taking on new business you don’t have to offer credit. Whilst the relationship is still in the early stages, a deposit or payment prior to delivery can be acceptable. Where you do offer credit to a new customer, ensure that you have done the appropriate credit checks.
Evaluate new orders: If it will put too much pressure on the business’s borrowing, consider turning it down.
Ensure your terms have been agreed: Make sure that your terms and conditions of sale, order specifications and payment terms have been understood and accepted by the client. Additionally, check the client’s payment procedures; if they only make one payment run per month you need to time your invoice appropriately to ensure you do not have to wait longer to be paid.
Review existing client relationships: Start asking for deposits or staged payments on large orders in order to purchase raw materials or secure the necessary contract staff.
Issue invoices on time: Where customers have credit accounts, send out the invoice on the day that the goods or services are delivered to ensure you are not inadvertently granting extended payment terms.
Consider ways to get cash in earlier: It may suit your industry to offer a small discount to customers who pay their invoices early to aid cash flow. Alternatively, you could look at establishing a direct debit payment system. Discourage payments that may create delays in money arriving in your bank, such as cheques and encourage fast payment methods such as online banking.
Instigate robust non-payment follow up: Do not be afraid of being firm when it comes to chasing payments; just ensure you are polite and professional.
Regular late paying or non-paying customers: If you have customers who are continually late paying or non-payers you have three options. You can stop doing business with them or, if you are not in a position to refuse work instigate a ‘stop list’ for customers you do not want to give more credit to or ask for payment upfront instead.
Move old stock as quickly as possible: The longer you leave it, the less it is likely to be worth and this will not only reduce your profit but your cash flow as well.
Consider outsourcing to a debt factoring company: This is worth considering for accounts where you regularly have to chase. Although you will pay a small percentage of the invoice in payment for this service, it will mean that you are able to collect payment on invoices you might normally have to wait weeks or months for.
Choose how to pay your bills: If you do have a temporary issue with cash flow, payroll has to be a priority, followed by key suppliers. You can then negotiate payment plans with the rest.
Employ or outsource a credit control administrator: If in house they can focus on credit control and debt collection or alternatively consider outsourcing invoicing and credit control to a virtual assistant or bookkeeper.
Sustaining strong cash flow is not just about keeping the wolves from the door. There are key advantages to being able to accommodate changes in business requirements with either short-term cash or long-term investment. So if you’ve not done so already, it’s worth considering tightening up your cash flow management.
If you’re looking for help to improve your business cash flow management or would like to know more about how we could help feel free to contact us on 0800 994 9016 or click here to request a free consultation.