Even the most stable and profitable businesses can experience temporary cash flow problems. These blips can cause serious consequences for a company – but they’re easy to avoid with the following tips.
1 Understand your cash management.
Before you do anything else, get to grips with your accounts. Look at your accounts payable and receivable, credit conditions and stock, and highlight any predicted shortfalls between income and expenditure. By preparing a realistic weekly or monthly cash flow forecast, you can highlight when you will need to borrow, whether via an overdraft, emergency loan or ongoing borrowing arrangement.
2 Invoice your customers promptly.
The sooner you invoice, the sooner you get paid. This may sound obvious, but many businesses become preoccupied with ongoing work and treat invoicing as a non-urgent chore. Instead, set aside time specifically for invoicing and make sure you collate the information you need in advance.
3 Make it easy for people to pay you.
You should aim to offer a range of different payment methods, as not all customers will prefer to use bank transfer. Cash, cheques, debit and credit cards and online and offline money transfer services may be appropriate.
4 Offer discounts for early payment.
Your clients may choose to pay early if they can pay a little less. A discount of just 5% may transform customer behaviour and ensure that you are paid in days rather than weeks or months.
5 Control your credit carefully.
Keeping an eye on when customers pay not only enables you to monitor and predict your cash flow but also identify poor payers. This will allow you to target your credit control activities and focus attention on clients who cause problems. Bear in mind that late payment can become non-payment – according to annual surveys by the Law League of America, the chance of securing payment for overdue invoices declines by 1% per week. In fact, once invoices become 90 days overdue, there is a 26% chance of a write-off and four months later the figure becomes 50%. Do not allow unpaid invoices to snowball.
6 Implement a proper credit control policy.
Once you have a firm policy in place, you can make rapid and considered decisions about how much credit to extend and to whom. You could also consider asking new customers to place deposits against orders, thus minimising your risk.
7 Carefully check your customers.
By employing robust credit checking procedures for new customers, you can minimise the possibility of bad debts. Equally, your existing customers’ circumstances can change so it can make sense to regularly review them and alter your credit policy as appropriate.
8 Sharpen your approach to collections.
By implementing a consistent collections policy, you can ensure that you treat all your customers fairly. It is also important to query overdue invoices quickly and implement an escalating series of reminders as due dates are missed before involving a debt collection agency if necessary.
9 Take full advantage of creditors’ payment terms.
Getting money in is only half the battle when dealing with your cash flow: you also need to consider payments carefully. By paying your suppliers electronically on the last possible day, you free up extra cash for use in the business.
10 Benefit from discounts wherever possible.
That said, your suppliers may offer discounts for prompt payment. You will need to balance the benefit of paying less against the impact faster payments will have on your cash flow.
11 Extend your payment times.
If you’re looking at a potential cash flow problem, talk to your suppliers to see whether they will extend due dates or offer payment in stages. These conversations are likely to go better with suppliers with whom you have a good relationship, so it makes sense to maintain regular contact.
12 Consider changing suppliers.
If your present suppliers cannot accommodate the payment terms you desire, you can consider changing. When evaluating potential suppliers, you should carefully balance the deals they offer against the payment terms they permit.
13 Create a monthly payment run.
Making all your payments on a set date rather than paying bills as they come in can make your cash flow much more predictable.
14 Manage your stock carefully.
Stock sitting in your warehouse ties up money that could improve your cash flow. By tracking daily sales and adjusting orders to reflect these trends, you can minimise your stock holdings and keep your cash free.
15 Approach your bank or an alternative lender.
If you’re still experiencing cash flow difficulties after implementing the foregoing steps, you will need to borrow. An overdraft can be very useful, but you might also consider an emergency loan from an alternative lender, which can give you the cash you need within 24 hours. For a longer-term approach, you could implement invoice factoring or discounting, which enables you to borrow up to 85% of the value of your invoices as soon as you raise them.
Carl Faulds is a business recovery specialist and as Managing Director of Cashsolv, he offers advice and alternative finance support to overcome cash flow problems and identify possible underlying problems that can be addressed to ensure a positive future for your business. Connect with him on Twitter.