Cash flow is vital for the health of your business and you need to manage it carefully. If you’re careless about cash, you could be in danger, whatever your commercial potential. But there are simple steps you can take to improve the cash flow in your business.
Cash flow challenges include lack of business information, poor systems and late payments from customers. In fact, late payments cost small businesses as much as £2 billion a year and 47% of Sage customers worry about them.
Sue Norris gives 10 effective strategies for getting your cash flow in order.
1. Get your figures right
Make sure your business has quality financial reporting and information systems in place. This is vital when it comes to managing cash flow, according to David Grier, managing director of Active Receivables Management.
“Quality management information provides an immediate and complete snapshot of what is current,” he says. “It can also give an indication of days ahead and future trends. Too often, it is woefully lacking.”
2. Credit check customers
Credit check all potential customers. Look at their record on how quickly they pay their bills, advises Jo Howard, marketing director for the business information division of Experian, which specialises in credit checking.
Also carry out regular monitoring on your existing client base. “This is vital, as over half of all bad debts arise from long-standing, rather than new customers.
“By making regular checks on their customers, companies can ensure they are alerted to any cash flow problems.”
3. Sort out the basics
Improve systems for billing and collection. Reduce stock levels so that you’re not carrying too much stock.
4. Look at payment records
Ask your sales staff to review the payment record of customers. Sales people can help to encourage customers to pay up, as they have the closest relationship.
Research shows that most businesses are getting slower at paying so be sure to chase early.
5. Offer early payment discounts
Offer discounts for early settlement of invoices. Impose penalties under late payment legislation for protracted settlement.
And if it’s your turn to pay, make prompt payments only when worthwhile discounts apply.
6. Keep an eye on credit
Train your people in credit control disciplines and techniques. Make sure you’re clearly stating payment terms on invoices. Avoid common areas of confusion, such as whether the payment is due 30 days after the invoice date or after the delivery date.
7. Use invoice finance
Consider using an invoice finance company. They can release up to 90% of the value of your invoices for immediate use, advises Steve Websdale, a director at independent invoice financier Venture Finance.
This is a flexible form of finance that grows with the value of your sales and helps to boost working capital to expand your business. However, there is a cost involved and it is only open to certain types of business, so be sure to check.
8. Understand revenue vs profit
Make sure the whole business, especially the sales team, understands the difference between revenue and profit.
A large-ticket sale may mean less profit than a series of smaller, higher-margin sales. The greater the profit margins, the more cash there will be for the business – so long as it’s not tied up in long sales cycles.
9. Increase cash sales
Increase sales involving cash payments, advises Andrew Ball of business-to-business marketing communications agency, Chaz Brooks Communications.
10. Forecast
Above all, ensure you make medium-term and short-term cashflow forecasts. Update these regularly.
Sage 50 Forecasting produces extremely detailed and accurate financial forecasts quickly and easily. Visit http://shop.sage.co.uk/forecasting.aspx or call 0800 33 66 33 to find out more.
If you're in Ireland visit http://sage.ie/sage-50-forecasting or call 1890 882522
How do you manage your cash flow? Do you think late payments are getting better or worse? Let us know in the comments box below.