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The old accounting adage still holds true – turnover is vanity, profit is sanity but cash is king. No matter how successful your latest sales drive may have been or how much profit you have made, nothing can bring down a company as quickly as a cash flow crisis.

We’ve put together some advice on how to mitigate such a situation…and what steps to take if you end up there regardless.

Manage Cash
• Firstly, diagnose the problem – it may just be…yourself. Too many business owners – especially new starts – are so consumed by delivering the product or service that they fail to manage admin effectively. It’s a common mistake to treat the business side of business with less reverence;
• Run a simple 4 week cash flow forecast spreadsheet – so that you have advance notice of any likely issues and can plan accordingly. Knowing your outgoings is reasonably simple – after all, you know what you have spent your pennies on – but forecasting income is significantly harder in most businesses, as you simply cannot predict the future; understating revenue in your cash flow forecast is therefore prudent;
• Maintain a buffer cash reserve if you can to give yourself leeway should payments not come in as anticipated;
• Keep watch – if not yourself as the business owner, then train someone in the office to keep a close eye on daily credits and debits, and flag when an agreed buffer limit has been breached;

Managing Receiveables
• Send your invoices promptly – after a project is completed, it’s all too easy to move on to the next one and forget to invoice, but a customer has no obligation to pay until the invoice is received. Don’t invoice once a week or once a month, but as soon as the goods or services are delivered.
• Spell it out – explain all the elements of the product or service required so the client fully understands what they are paying for and there is less opportunity for any payment delaying queries.
• Make it easy – give the customer a range of payment options, and make sure information such as bank details is very visible; offer direct debits if it suits your business model so that clients pay upfront on a set day of the month, meaning you can plan to make your own outgoing payments several days later
• Split the difference – consider splitting a large bill into a number of smaller invoices; a client with cash flow issues is more likely to perceive a large balance as a problem and therefore sit on it, whereas smaller more manageable amounts are likely to be paid more quickly.
• Highlight terms – confirm terms upon engagement but also reiterate them on your invoice so that the payment deadline is clear, also pointing out any late payment action such as interest and charges payable. Also use the phrase “Payment due within 30 days” as opposed to “Net 30” so that there can be no ambiguity over the timeframe – in the same vein, the phrase “due on receipt” gives an argumentative customer ammunition to contend the date an invoice arrived
• Consider commencement deposits – if you’re in a project based sector, ask for a percentage of the fee up front to give yourself some headroom; take the stance that you are ready to start for those who are ready to pay.
• Discuss retainer payments – if you work on a long term basis with key clients, request monthly retainer payments for an average amount, so that you have a set income coming in each month; some systems will automate the invoicing of these to ease the admin burden;
• Consider early payment discounts – of course you want to be paid in full for work you have undertaken, but if it comes to the cash being in your pocket rather than the clients, then you may want to offer a 1% discount for payment within 10 days, for example. The earlier you get paid, the less risk of something happening to your customer, plus from a working capital perspective, it lowers your cost of borrowing;
• Mind your manners – if the person paying the bill is not your immediate client, then be sure to build a relationship with them too – plus research has shown that messages such as “thank you for your business” can increase the chances of your invoice being higher on the list of payables.

Managing Payables
• Extend payables as long as possible – aim to get the best deal you can on payables e.g. aim for a minimum of net 30, and try to push for net 60 if you can.
• Pay on time – some suppliers charge late fees so make sure you pay on time, otherwise you are effectively paying more unnecessarily for the goods and services
• Call in a crisis – burying your head in the sand is not a sane option. If you know you are going to fail to pay a bill on time, proactively let the supplier know and they will be much more agreeable to a payment plan

Where to turn if you do have a cash crisis…

The important thing is to consider the sources of finance immediately available to you, the most obvious starting point being your bank. These days, central credit scoring is rife, which is why its important to run your account sensibly on a day-to-day basis so that you are a safe bet should the worst happen. The other key premise to is keep your bank manager close – if they understand your business well, they will appreciate that a temporary cash flow situation is just that – and not an underlying showstopper – in which case they may have some local discretion to offer a short-term facility till the storm has passed. You may also want to consider invoice factoring, where your customer pays debts due directly to a third party company who effectively take on the cash collection role for you – at a fee, of course.

If you are having cash flow difficulties, contact the office to speak to one of the Evans Entwistle team for further advice.