Even when times are good, healthy cash flow management is business-critical. In tough economic times, it is the only way to ensure your business survives. While a lot of the best tips are common sense, it is all too easy to forget them when you are under stress.
Here are my top cash flow tips
- Face up to reality: You know how when you watch a horror film, what you don’t see is always much more frightening than what you do? So it is with your finances. When things get tough, don’t fall into the all-too-easy trap of not looking at them. You will only be letting yourself in for a string of sleepless nights. Make a routine, once a week, once a fortnight, whatever suits your business model, to go through everything and deal with it. Then the rest of the time, you can be stress-free knowing it is all in hand.
- If you are not comfortable with manual cash flow plans, there are a lot of useful cash flow software tools out there now, which can help give you an overview. That said, a basic computerized accounts package will print you out your creditors and debtors in aged months, so it is pretty easy to construct your own. Having a prepared cash flow forecast may seem like a hassle, but it means you can set targets, plan, and control.
- When you print out your cash flow, have a serious look at it. If you have more customers taking over 30 days and more suppliers getting paid under, that should be a problem that is easy to remedy.
- The other great advantage of proper controls and planning is that you will see in advance if you are going to be in trouble. The longer you have to find additional funds, the more chance there is of you finding some. Even your bank manager will be much more inclined to lend on a business that demonstrates solid knowledge and control than someone in a last-minute panic. And who can blame them!
- Consider your payment structure. If you are in the service sector with regular clients, consider putting set packages together for your customers where they get a certain number of hours for a fixed monthly rate, payable in advance, and ideally by direct debit.
- If you are selling business to business products, think about offering discounts for deposits, or insisting on them with all new customers.
- We can get frightened of chasing customers for money, worrying we will upset them, and they will never order again. It requires a shift of mindset to question if a customer that doesn’t pay their bills is worth having. Low-value ones are certainly not, and you want to weed them out fast. For the larger accounts, it is still a consideration. No business can be better than paying out to do work and not getting paid.
- Find out the name of the person who pays your invoices, be it the company owner or the newbie at the bottom of the pile in accounts. Speak to them regularly. Make them your best friend. People in that department are so used to getting abuse that someone who is kind to them will inspire them to make every effort to get you paid, and a personal relationship will pay dividends (literally).
- Be prompt with your invoices. Any day you fail to invoice is extending your credit terms. Also, be timely with your statements. Many companies will not pay on invoice alone, and one or two use the excuse of “never having received the invoice.” So, send statements by email and get them receipted.
- For small customers who are not of great value but continually late, draw up small court claims and send them a copy of it with the invoice before you file it. That moves the majority into paying up.
- Consider charging interest. The problem is that this is both extra work and tough to enforce, plus many businesses will rant and rave till you remove it. Expect to remove it the first time but on a promise that you will be paid on time in the future.
- Be very aware that cash flow issues are going to cause you added cost at the very least. If you are borrowing from the bank, your interest payments will soar. If you are using a factoring company, those monthly payments could quickly turn your profitable business into a loser.
- For many companies, the most significant outlay is payroll. In some sectors, that still means weekly pay, and if you are being paid on 30-day plus, that is a lot of cash flow you are carrying. Consider incentives for employees willing to change to monthly pay.
- Another considerable expense on the cash flow for many people is the rent, and landlords usually want to be paid in advance. Talk to them and see if they will change from quarterly to monthly in advance. While it might mean an amendment to your lease, some landlords would prefer getting something for their own cash flow and a continuing tenant than the possibility of one leaving or worse.
- While the legalities are that you should always pay the oldest invoice first, there is a moral onus on all of us as business owners to do our utmost to see the tiny businesses and one-person bands get paid without fail.
- The worst thing you can do to a supplier when you aren’t going to be able to pay them on time is not talking to them. It leaves them worried and unable to plan their own cash flow. Keep them informed and updated, and don’t dodge their calls. Instead, explain that you only do finances on a Wednesday (for example), so you only have to face up to the calls once a week.
- If you really can’t pay on time, both talk to them personally and pay some of it with a clear plan for when you will be able to pay the rest. Use this for an emergency, not as a newfound cash flow plan.
- Above all, always do what you promise. Anything else destroys all trust, and you will end up with very angry suppliers indeed.
Remember, above all, a profitable business is still likely to hit the wall unless you control your cash flow.
You might find this article of mine on why we need to rethink our financial knowledge