Jul 30 2012 By Mike Parkinson
Making sure that cash flows properly in and out of your business is a nightmare for many owners. But in fact, there are steps to take which will stop you having restless nights.
Crucially, the cash flow gap between money coming in and going out needs to be understood. This makes it easier to spot “holes” in advance and reduce their impact. It makes planning ahead for liquidity squeezes easier and reduces dependence on bankers. Another benefit is that any surpluses can be spotted for investment. Well, we can dream.
There are some key steps to speed up cash flow. The most basic is to reduce the amount of time it takes customers to buy. The quicker you can collect cash, the quicker you can pay your own bills and chase profit. Make it easier for people to buy your goods or services. For example, accept internet payments and orders over the phone.
Most businesses extend credit to customers, viewing it as a key tool for attracting new ones. But the risks are high, and the longer a customer takes to pay, the greater the chance that they will never do so. Your debtors are key to managing cash flow and poor credit management can seriously undermine any other efforts you make to keep the flows of money in and out flowing manageably.
Try to reduce the risk by doing some basic credit checking procedures. Rather astonishingly, the analysts Dun and Bradstreet estimate that 90 per cent of companies grant credit without a reference.
The obvious major risk of this omission is ending up with ‘can’t pay, won’t pay’ customers. A full credit report reduces the risk of that by giving details of company results, county court judgements and a recommended credit rating.
It is also straightforward to search the Register of County Court Judgements. Also, anyone can access the accounts that all companies must file at Companies’ House. Although be aware that information on small enterprises is often very limited. Sometimes visiting the premises of a company will tell you all you need to know!
A belt and braces approach to reducing the risk of rogue debtors would also include taking out credit insurance.
There are also key things that you should do once you have your customer. The most obvious perhaps is to consider invoicing earlier, not least because some of them will have systems in place to pay based on so many days after receipt of the invoice. So the earlier you send it in the better.
Do not give customers an excuse to delay payment because of administrative errors on the invoice. Another important step should be to reduce the collection period, the key to which is organisation. For example, learn the payment cycles of your debtors. Find the last date for getting an invoice approved and included in a payment run. There should also be no embarrassment in chasing up a debt. After all, you kept your side of the bargain.
Aim to remind customers for payment a week before it is due, and send statements as a further gentle nudge.
Personal visits will be a lot more effective than mail. It is also worth reminding the buyer that they have a credit limit with you and supply will stop if payment is not received.
Review your methods for receiving funds. BACS is much faster than a cheque. Even if customers pay on time, how they pay can have an impact on cash flow.
Consider your own debts. There may be scope to stretch payment dates, but approach this with caution. The last thing you want is to alienate your own suppliers.
All journeys need maps and running a business has its equivalent: Cash flow forecasts. At a basic level these let you identify gaps. But they are also vital if applying for a loan.
I recommend a 13 week rolling cash flow forecast, updated weekly, to keep on top of the issue, with annual rolling cash flows updated on a monthly basis.
The forecast should include a sales forecast, anticipated cash outflows and inflows, and a cash flow bottom line.
There are steps to bridge a cash flow gap if that is still where you end up despite precaution, provided actions are taken early enough. One way is to increase sales by reducing prices or increasing marketing, although this can sometimes widen the gap. Another option is to increase margins by raising prices or cutting costs. But be careful not to put off customers or squeeze suppliers.
Some also argue that offering discounts for early payment helps, as does improving cash collection procedures. However, the key is not to allow customers to pay on normal terms whilst still pocketing the discount.
Cost cutting also helps, as does reducing stock levels judiciously and putting off major purchases.
It is tempting to roll over a debt repayment, but this can be hard in a recession, as can finding external financing from investors or lenders.
Cash flow is often a problem, but it is one that can be managed. There really is no need to lose sleep over it.
Mike Parkinson is a partner with London accountants Barnes Roffe