Sometimes as company directors our businesses can seem to be doing a successful trade, sales are up, targets are being hit yet cash flow remains an issue, but even the most successful companies have cash flow issues. Do not fall victim to cash flow issues that could have been avoided, more and more you will notice your debtors will not adhere to your payment terms and more often than not, this will mean your company does not get paid on time.
Put those important processes in place now regardless of having an immediate cash flow issue or not. Based on my experiences I have described below a few simple tips that I suggest you can put into practice.
Carry out a cash flow forecast
Forewarned is forearmed’ as the saying goes. If you can predict when cash flow is likely to be tight, you can prepare for it. An important part of the financial planning of any company is performing a cash flow forecast. Get the assistance of your accountant with this if necessary, especially if you have to purchase seasonal stock such as retailers in October in the lead up to Christmas.
Send out invoices promptly
It is inevitable that there will be some delays in settling invoices. Your customers will vary as to the length of time they take to pay. But make sure you do your bit, and send out the invoices as soon as the transaction has completed. One thing that is almost certain is that you won’t receive payment before you have sent the invoice!
Offer incentives for early payment
You may be thinking that receiving payment for invoices will always be a long drawn out process as it will be in the customer’s interests to delay payment for as long as possible. Why not introduce incentives for these customers to pay early? This could be in the form of a discount on the sale price, but if you don’t want to do this, there are other incentives you could offer, such as giving special gifts. But note you have to be careful not to just offer this out to all customers i.e. the good payers as they will pay regardless, so you do not want to squeeze your profits further for payments you would have received on time anyway.
Offer additional methods of payment
Why not make it as easy as possible for your customers to settle their invoices? It may well be the case that some will be more likely to pay promptly if you introduce a greater variety of payment options. Can you, for example, offer payment by cash, cheque, debit card, credit card and money transfer?. Even SME’s can have a simple Paypal account to accept credit card payments without the added expense of terminal fees.
Avoid unnecessary stock purchases
Some companies have large warehouses crammed with stock that stays there for long periods. All the time it is there, it is costing money – consider the costs associated with warehousing itself, plus the need to insure the stock.
Remember that some companies are successfully operating on a ‘just in time’ method, where goods are held as stock for a very short time before being dispatched. You will know what your regular sales patterns are, so try and ensure that the amount of stock you hold is commensurate with this.
If you cannot sell your stock, you may need to consider trying to sell it at a heavily discounted price, or trying to find another company who will buy it. As a last resort, you may need to destroy some of your stock – an extreme option for sure, but if it is never going to be sold, is not the best option to cut your warehousing and insurance costs?
Chase your late payments
It is a fact of life that some customers will be very slow in settling their invoices, and that some will forget all about them. Ensure that you have systems in place so that you know when invoices are due, so you can chase up late payers. It may be advantageous to call your debtors a few days before falling due to make sure they have the invoice, they are happy with it and that it is on the next payment run. At least you eliminate the most common of excuses i.e. we have not received your invoice.
Look at changing your own payment terms
Many of the suggested ways of improving cash flow are concerned with invoices you send to customers. But the way your company settles invoices that it receives also has an impact. If you are promptly settling all your invoices in one lump sum payment, consider whether you could negotiate alternative payment terms, such as payment in instalments. Or could you receive discounts for early payment?
Review your expenditure
At regular intervals, all companies should review their expenditure to identify areas where savings could be made. When the subject of cost cutting is mentioned, some instinctively think this refers to staff redundancies, always an unpalatable course of action. But other ways you could cut costs include: closing one company site; moving to smaller premises; identifying unnecessary use of heating, water and electricity; cancelling subscriptions to trade publications which no one reads; hiring vehicles as and when required rather than having a company vehicle fleet; and reducing travel and accommodation expenses that staff claim.
Provided you meet the minimum annual turnover requirement – this varies from £250,000 to £1m depending on the lender – consider using a method of invoice finance, such as invoice discounting or factoring. Here you can borrow most of the invoice amount as soon as the transaction is completed, before the loan is repaid on settlement of the invoice.
Article by Keith Tully. Keith has been involved in the business rescue industry for over 20 years and in that time has worked not only for a ‘Big 4’ Finance firm, but now is a Partner at the largest independent business rescue specialists (Real Business Rescue).