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.
A cash flow budget is a really useful business tool. It estimates your income and expenditure over a set period. It allows you to see where you might have larger than expected outgoings, or where you may be invoicing more, or bringing in more profit. This helps you to plan ahead, making sure you have enough cash available for tighter times and that you use any excess cash wisely.
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. Knowing when you need to settle invoices will help you plan ahead. You should always have enough cash available to pay your employees, your essential bills and your key suppliers.
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. You can also speed up payments by adopting technologies like electronic payments – research shows that debtors pay faster when they can pay electronically. You might also want to investigate whether some of your clients can move to a pre-payment plan, which gives you guaranteed cash in the bank.
You could also offer a discount for quick payment; something that can appeal to many customers.
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.
Also consider taking staged payments. If you are a service-based business rather than a product-based one, you can ask for 50% payment (or any percentage you choose) up front. This helps your cash flow and also gives both parties a greater incentive to commit to the project.
Evaluate new orders:
If it will put too much pressure on the business’s borrowing, consider turning it down. Although it’s tempting to say ‘Yes’ to everything, there are times when slowing things down is actually good for your business.
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.
Terms also work both ways: you can talk to your own suppliers to re-negotiate your own payment terms, which can help to relieve your cash flow.
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. You can also re-negotiate terms with existing clients – people are used to rates being increased or additional costs being added. If you communicate well, and perhaps temper your raise with an offer or initial discount, your clients will accept a price increase.
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. Service-based companies also don’t have to wait until the end of the month to invoice. Instead, invoice as soon as the order is made or the work is completed, to help get your invoice into your client’s system as soon as possible.
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.
Track the invoices coming into your business
Make sure you’re not paying out more than you have to, by either having a system that helps you with your credit control service, or by outsourcing your bookkeeping to a professional. This will help you keep track of the invoices coming into your business, ensuring that you don’t pay people more than once, and that you know the invoices coming in are for the correct amounts.
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.
Consider a Line of Credit
A Line of Credit gives you access to cash when you need it and can help to tide you over if you unexpectedly have to pay out a lot of cash, for example, when you don’t have enough coming in. You can agree an amount for your Line of Credit, and you only use it when you need to, and you only use the amount you need. You only pay for what you borrow, and it can help to plug a gap in an emergency. Setting one up when everything is going well is a good idea – you then know you have a fallback position if you really need it.
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. Having a good stock management system will help you to see what’s not moving, so you can buy less of it in the future. Look for sale or return offers from suppliers and always negotiate terms so you are not left with stock you can’t sell.
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. You can also outsource your invoicing and your bookkeeping so that there is a clear connection between invoicing, payments and outgoings. A keen eye on your books can help you see where changes can be made to improve your invoicing and credit control.
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 from a credit control administrative assistant or would like to know how a personal online assistant could help with other areas of your business feel free to contact us on 0800 994 9016 or use our contact form in the menu above.