As the news on the economy starts to look at least a little brighter
and increases in optimism from some quarters of British industry you might be looking forward to increases in business yourself. All good, so now is a really good time to sit back slightly and make sure you are in control of the most important thing in your business – the cash.
In our experience, born out by the research, insufficient capital and poor cash management are two of the most common reasons businesses go under. So, developing a healthy obsession with cash flow and cash management is no bad thing.
Here are our top tips for keeping the cash rolling into your business.
1. Invoice quickly
I’ve never quite understood businesses that go ahead and do the work and then struggle to get the invoices out. You can’t expect to be paid if you haven’t raised the invoice.
Set up a system for invoicing that’s suitable for your business. For some monthly or weekly invoicing for all work completed in the previous period will be appropriate, for others invoicing immediately the work is completed will work best.
2. Set clear terms for payment
Make sure your payment terms are covered in any contract or agreement with customers, so that there is clarity about when payment is due. Without these payment terms it’s all too easy for customers to delay, pleading ignorance or using the lack of deadline as an excuse.
You might consider upfront payment, or part-payment, for your services. Taking a deposit, for example, is recognised practice for large retail purchases, holidays and building works, can you adopt the same approach in your business?
3. Chase late payers quickly
If your payment terms are 30 days you should have a system in place to chase payment on or around the 30 day deadline. Most bad debts are those that have been allowed to fester for long periods of time. The sooner you chase the payment, the sooner you will either receive the cash, be given an explanation for late payment (which might actually be to do with dissatisfaction with the service provided and therefore need sorting out) or can agree payment terms and interest, for example if your customer is experiencing cash flow difficulties themselves.
4. Make someone responsible for cash
The informality of many small and family owned businesses means that everyone tends to muck in and just get on with things. When it comes to invoicing, credit control and cash flow management however, it’s a good idea to make one individual responsible. Ask them to prepare a cash flow forecast. This will show you when you expect money to come in and go out and highlight when cash is likely to be tight in the business. With this information to hand you can plan accordingly, perhaps minimising spend or being even tighter on credit control.
5. Think about how and when you pay
Of course it’s important to keep to the terms set by your suppliers and pay by their deadlines but certainly don’t pay them before the deadlines, unless there is an appropriate incentive for doing so. Look out for opportunities to delay payments or make savings by paying in a particular way. HMRC for example allows more time to pay for VAT and tax when you pay by direct debit.
Developing a healthy obsession with cash will stand you in good stead. As with most things in business the most important thing is to have a clear plan and manage to that plan. If you do that you will spot any potential problems in advance and be more able to deal with them.
Chartered Accountant, Birmingham and Solihull