We all know that cash is king and making sure that more if it is coming in than is going out is vital.
Having a cash flow forecast is important, particularly if you have a seasonal sales cycle when you may have to ramp up production, incurring costs before you are able to sell the goods. The forecast will allow you to track where you are with your money each month and show any months where the costs may outstrip the incoming revenue allowing you to plan for the shortfall, rather than it being nasty surprise.
Sound daunting? Managing your cash flow effectively needn’t be too difficult. The following activities are good guidelines for any business, whatever its size.
1. Incentivise your customers to pay you sooner
- You could put links on your invoices so they can go direct to the payment page – many accounting packages have this functionality. You may have to pay a small fee for it, but if it gets your money in quickly, it’s worth considering.
- Also – do put on your invoices how to pay you. This may sound completely daft, but I regularly get invoices with no payment details.
And definitely have your BACs details on there.
- Some businesses offer a small discount for up front or early payments.
- Some businesses insist on payment in advance of the work being delivered, or staged payments to save having to wait to the end.
These aren’t incentives I know, but useful to make sure you get your money before the work is delivered. Training courses and coaching are examples of this payment model.
2. Negotiate better deals with your suppliers.
You need to try and make sure you get paid by your customers before you pay your suppliers. If that equation is the wrong way round, you’re always going to have a problem.
- Do you know how important you are to your suppliers? If you provide a good percentage of their business, you are in a stronger position to negotiate better terms.
- Build a relationship with your key suppliers. You may be able to help each other out getting more business.
- Ask if there are better priced products with the same level of quality that you could be buying.
- Consider getting in an expert to review your utilities and other costs such as printers, phones and so on. You’d be amazed at what you might be able to save. Procurement specialist companies like ERA could really help.
- Review your contracts yearly – it’s always good to shop around, and it keeps your supplier on their toes, particularly if you enter into a tendering process for your bigger purchases.
3. Know the invoicing process of your customers
- Many an invoice hasn’t been paid by larger organisations simply because the correct t hasn’t been crossed. Really understand the invoice process before you invoice. And have it documented so it’s easy for others to follow.
This is vitally important particularly if it is a large corporate who already has you on 90 day terms. You need to know that the money will be paid on time.
- For large invoices and complex invoice payment systems – get the invoice checked over by someone else to double check it before it goes out.
- And get to know the people who pay the invoices – call and speak to them, rather than just email. Build a relationship with them, it makes it more difficult for them to not pay your invoice. I know of one CEO who was owed a large amount of money that he had been chasing for months – he actually went to their offices and refused to leave until he was paid. It worked! I’m not advocating this as standard practice, but sometimes needs must.
4. Have a process in place for invoicing and debt collection.
- Fix one day a month when invoicing will be done and stick to it.
- Have your process documented and in place so it’s easy to manage.
- Automate the process as much as possible. For example, if you have recurring invoices such as retainer invoices which are the same each month, many accounting packages allow you to recreate the invoice quickly.
- If your accounting system has automatic chase options for late payments, put them on. I have a three tier escalation process that automatically kicks off from the day after the invoice is due.
- And chase. Have a day a month when you chase – go through your aged debt report monthly.
5. Dealing with habitual late payers
Are there regular customers who always pay late? How important are they to you?
Are you following the correct process? One of the banks we used to work with used to change their process and not tell us so would suspend payments. It was only because we had a solid process in place that we would find out earlier. And in fact we would often check before month end to make sure the process was still the same.
It can be worth having a conversation with them to ask why they are late each month to see if you can:
a) embarrass them into paying on time
b) discover if they are actually struggling to pay you and to see if there are other options that could help particularly if you want to keep them
c) look at terminating the relationship. One of my clients spends more time chasing small amounts of money than he earns doing the work. Sometimes, it’s just best to walk away from that kind of customer.
6. Don’t over deliver
This may sound counterproductive as we want to delight our customers. But if the delighting of the customers takes many more hours for which you aren’t billing, then your margins are going to be affected. You could try calculating the time/cost/profit to see the effect.
Let’s look at an example:
An IT service support consultant is billed out at £75 per hour and is contracted to deliver on-site support to company for four hours a month.
Let’s say his all in hourly cost is £25.
So – four hours at £75per hour is £300 revenue
The cost is £100
leaving a profit of £200.
If he does an extra unbillable hour as the contract stipulates four hours only, then the cost goes up to £125 and profit is down to £175. Over a year, that’s £300 of lost profit.
Whilst that may not seem much, imagine if this happened on each client so there is also the cost of him not doing billable work for another client. A billable hour for another customer instead would generate you £50 an hour of profit. That’s another £600 a year of profit you’ve missed out on.
Track your time and that of your employees, particularly the customer facing ones. For organisations with multiple employees there are time sheet systems you can use. Something like Replicon is excellent if you have consultants or other people out on client sites and at only £15 per month per user, it’s pretty reasonably priced.
If you can’t get the customers to pay on good or even standard 30 day terms, and you have to pay your suppliers on 30 days or less terms, it can play havoc with your cash flow. If you are a smaller company working with a much larger one, they quite often have non negotiable 90 day terms which can be a nightmare.
To help smooth this problem out, you may want to consider getting paid your invoices by a factoring organisation (could be a bank for example). They will pay you the invoice value less a small percentage and then they will collect the money from the customer on your behalf.
If you want to know more about this have a chat with Lime Consultancy – business finance specialists.
8. Keep some reserves
Tempting as it is to pay yourself a juicy dividend, it’s always prudent to keep some reserves to help smooth out any cash flow fluctuations such as an unexpected late payment, or a client loss.
We deliberately took lower dividends in order to keep money in the business, so we could reduce and finally eliminate our need for factoring of invoices as we had a big enough cushion to be able to cover the discrepancy between the time it took for the our clients to pay us and having to pay our contractors.
So there you have it – Eight top tips for improving your cashflow. Have you any others to add to this list?
If you’d like a copy of a cashflow template or to have a no obligations chat about your business, please get in touch – firstname.lastname@example.org
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