Having a frequent and measured flow of cash is vital to the long-term security of a company, especially for small businesses where keeping their finances in order is of paramount importance to their future success and expansion.
The reality is that most SME’s simply do not have the financial reserves to enable them to wait extended lengths of time to receive outstanding payments, without it significantly damaging their short term finances and possibly causing long-term problems. To put this in perspective, recent research revealed that one in four businesses fall into insolvency due to late payments on their invoices, whilst an estimated 158 million working hours were lost last year chasing up overdue payments. Moreover, an estimated £20 billion is thought to be lost by businesses each year due to them adopting ineffective repayment collection practices, highlighting the importance of chasing up outstanding payments quickly and having an efficient invoicing system. Put simply, cash flow problems can break a business.
As such, taking positive steps to ensuring that your business has a regular and sustainable cash flow is pivotal to its survival, and will make sure that you can make calculated and low-risk decisions in the future to do with: expansion, obtaining new clientele and increasing expenditure. Below is our guide to ensuring that you achieve exactly this so that you can proceed in the future confident that your business is in good stead and financially secure in the long term.
Research potential clients to ensure they can pay invoices
Having reliable clientele customers who you are confident will pay your invoices on time is essential to ensuring a healthy cash flow for your business. The last thing you want when acquiring new business is adjusting your cash flow forecasts, and then being subjected to a series of avoidance tactics and late payments. As such, you should take steps from the first point of contact with a potential client to evaluate how reliable they are as a debtor, and whether they are likely to adhere to the payment dates outlined in a future contract.
Conducting a credit check on a prospective client prior to forming an agreement can help you achieve this, and will give you a good idea of whether you can trust them to make payments on time. Moreover, doing some research in the Gazette archives will alert you of whether any of your current enquirers have been in charge of a company that experienced company liquidation in the past, which should give an insight into how adept they are at running a business and keeping their own finances secure.
A common and damaging mistake that a number of small businesses make in their initial years is overtrading and expanding too fast, which simply entails stretching their short term finances to the limit in order to acquire a long term gain. Whilst rapid expansion may be the dream for most newly formed businesses, it can often lead to serious cash flow problems either due to strenuous demand on working capital or a lack of resource to actually fulfil the extra work.
Essentially, when your company begins to gather momentum, and an increasing number of people make an enquiry about using your service, you need to consider whether your current available income can afford the extra expenditure costs that come along with providing supply for the new demand.
Greater levels of business tend to necessitate a rapid outlay of cash, and this added expenditure usually needs to be supported by the potential additional income you stand to acquire is due. So when undertaking an expansion of your services, analyse whether your short-term finances can afford new costs that might come along with it, such as a higher wage bill for new employees, the rent costs on a new premise, new equipment and larger orders from suppliers. If you are confident that you have a healthy enough cash-flow to achieve this, then you should proceed with expanding your range of clients, as you will be increasing your revenue in a sustainable manner. However, if you find that you would be overly reliant on future income in order to afford the costs of expanding, then it would be better to take things slower until that time that your cash flow is strong enough to afford higher short term outlay to acquire greater long term gain.
Set out clear repayment terms with clients:
When agreeing on contractual terms with a new client, set out a clear repayment plan that both parties are happy to adhere to. This is essential for ensuring that cash-flow difficulties do not arise later on down the line. A good approach to adopt would be suggesting that they make their payments within 30 days of billing, as you will often have to pay your wage and supplier bills on the same basis.
Try to avoid agreeing to a payment arrangement that involves cheques, as this is a method that often incurs a wide range of avoidance tactics and also takes an extended period of time to process. Setting up a direct debit scheme in which a client’s outstanding payments are taken on a certain date is an excellent way of preventing cash flow difficulties, as you will be certain that you are receiving a fixed amount on time, each and every month. You could even incentivise a client agreeing to a direct debit scheme because the reality is that it is far better to receive payment in this manner than any other. Outside if this arrangement which I accept may prove difficult with some clients then insist on electronic payments direct to your bank account.
Agreeing on an interest charge for overdue payments within the initial contract could also be a natural deterrent to making late payments for your clients, and you are legally entitled to collect interest from a debtor who defaults on their payment.
Optimise your invoicing and recollection strategy:
Being efficient with your invoicing and optimising your repayment collection practice with your customer’s clientele is vital to preventing cash flow problems. The last thing you want is for one of your own creditors to be pushing for a winding up petition in court against your company, especially if this is due to missed payments that you have been unable to make because of cash flow problems caused by inefficient invoicing.
You want to ensure that you send invoices out to people who owe you money as soon as it becomes due, as this will usually mean you get paid quicker and can then reallocate the income towards different areas of your company’s expenditure, such as its wage bill. Using an online invoicing system can be great for doing this, and will also alert you instantly when a payment becomes overdue and who you should be pursuing to address the issue. Using a computerised system will also lower overhead costs, so it is definitely worth considering. There are also ‘cloud’ based system software worth investigating which will ensure valuable customer data is never lost.
Ask around your peers as they are likely to have dealt or are dealing with the same people. Analysing your customer’s repayment patterns is also an excellent strategy to adopt. If a client tends to make payments in 30 days, but you start to notice that this has extended to 90, then it is safe to assume that something has happened to their own financial situation that is inhibiting them from making their payments as regularly. Taking action when you first notice this and agreeing a revised payment schedule will help you maintain a strong client relationship whilst also ensuring that you can adjust your expenditure plan accordingly until that time that they make their payment.
You can also devise a repayment strategy toward your clients and set a monthly target for the minimum amount you require in order for your business to maintain a positive cash flow. Have your staff monitor the status of the invoices you have sent out, such as whether it has been received and authorised, and it might even be worth asking one of them to send out a memo to any client who’s due date is nearing, to remind them to make their payment on time.
Set weekly cash flow goals:
Simply put, keep your cash flow healthy and the profit will follow suit, and you should keep this in mind when planning your business strategy. Instead of creating profit orientated targets, create a cash flow target for each week and strive to uphold this as the bare minimum. By focusing on achieving a positive cash flow, rather than purely on profit, you will ensure that you never overstretch your business and commit to higher levels of expenditure that you simply cannot afford on a short term basis. If you are aware that your industry goes through cycles, or there tend to be seasonal dips in demand and revenue, then factor this into your cash flow forecasts and reduce company expenditure to counteract the effects of this.
Moreover, consistently monitoring your cash flow can help you spot cash flow gaps in the future, and this will assist you in making informed and correct decisions to do with the finances of your business. For example, if you notice that your business is going through short term cash flow difficulties, then you could potentially consider acquiring a competitive rate loan to cover the costs whilst you wait for the outstanding money from your clients. Similarly, this added knowledge could prompt you to chase up late payments more vigorously, which is an organic way to address any cash flow difficulty.