Many businesses, particularly in the early years, struggle with cash flow – there is more going out than coming in – but this cannot carry on forever. Most businesses that go bust do so because of lack of cash rather than lack of profits.
The principle of solving cash flow is easy – you need more money to come in quicker and more money to go out slower. Easy in principle, perhaps not so easy in reality.
Here are our top tips on improving the cash flow for your business and helping avoid those awkward conversations with the bank manager.
- Invoice sooner rather than later
This seems like a no brainer but the sooner you send out your invoices, the sooner you will get paid. When selling goods this will often be immediately, with payment required before despatch, but not so easy with services. Invoice as soon as the work is completed, or if the amount has been agreed in advance, send it right at the start of the project saying its due on completion.
- Encourage faster payment
Give set payment terms to your customers and maybe even encourage early payment by offering a discount for payment within a certain period. Alternatively, you could charge interest penalties if they are not stuck to and the customer pays late. This will vary from industry to industry as to what is acceptable but make it clear when things are owed.
- Make it easier for your customers to pay you
How many times have you received a bill from a power company that has thoroughly confused you as to what is actually owed and how and when payment is due? Make it simple for your customers to pay you. If you are using Xero then make use of the payment services that integrate with the system so your customers can literally click a button on your invoices and make payment to you.
- Have someone look after your customer accounts
Having someone with the dedicated task of monitoring payments and chasing unpaid invoices will make sure things don’t get out of control. It doesn’t have to be a big job, but sending regular statements or invoice reminders will help ensure your payment is on your customer’s radar. Systems like Xero can automate a large part of this for you so it happen in the background without you having to worry.
- Keep back some cash reserves
Withdrawing money as soon as you see it in the bank is tempting, but leaving some in reserve will make it a lot easier to run the business and avoid the stresses of any shortfalls. It only takes one customer to pay late, or some unexpected bill to derail the whole month and cause you stress you don’t need.
- Extend payables as long as possible
We are not saying undertake the practices of well-known supermarkets and screw your suppliers for as long as possible. You want to be an ethical business and also have them supply you in the future, but if they give you 60-day credit terms and you need it then, take it. If they take payment by credit card, pay on the company card and perhaps buy yourself another month of time before you have to part with any actual cash.
- Get a cashflow injection
Boosting the cash in the business outside of your sales and purchases process will make things a lot easier for you at key times in your cycle. Can the directors lend the company money? Can outside finance be bought in? Will the bank give you a good overdraft facility that doesn’t cost too much? It’s better to have these in place before you need them rather then waiting until you do.
- Have a budget or forecast
Know the fixed costs that you have going out each month – rent, salaries, insurance, etc – and come up with a breakeven point – the minimum cash you need each month. This will allow you to have a start point, anything else you bring in above that can go to paying the other variables and hopefully lead to cash reserves.
- Make use of technology
As stated above, accounting systems like Xero can make it much quicker and easier to stay on top of cash flow. Being able to see at the click of a button what’s in the bank, what due to come in and due to go out will give you a much more informed position to make decisions from. Sitting with a pile of invoices and bank statements trying to work out what’s been paid and what’s due is no easy task.
- Don’t use tax money to finance your business
Be disciplined and set aside your VAT and corporation tax in a separate account and only use it for true emergencies. If you fail to pay the tax over when due it will cost you far more in penalties, fees, interest, hassle and aggravation than obtaining some short-term financing.
Different businesses have different circumstances, so if you are unsure how to improve your cash flow in your sector then speak to your accountant. Chances are they will have worked with similar businesses and are better placed than anyone to advise you.