First published at https://businessdoctors.co.uk/12-tips-for-improving-your-business-cashflow/
Challenging economic times have a massive impact on businesses – revenue and profits may dip while expenses continue to increase, which puts an enormous strain on your cash flow.
Cash flow is the lifeblood of any business, so when times are tough, managing cash flow effectively can make a difference. If you don’t pay your bills on time, you may face late fees, penalties, and damaged relationships with your suppliers and customers, which can put your business at risk and harm your mental health.
*Approximately half (42%) of Small to Medium Enterprises (SMEs) report that managing cash flow is a significant issue (Dept. of BIS survey 2016). Also, cash flow problems are likely an important reason to hold back business growth plans.
Here are my 12 tips designed to help you manage your cash flow more effectively and avoid the mental strain of poor cash flow management.
Managing cash flow – how to ensure that your business doesn’t become a casualty
#1 Be clear and agree to your payment terms upfront before doing any work
Many small businesses need to do this and are often taken advantage of. Do you have the Terms and Conditions on all paperwork?
#2 Invoice products and services as soon as you can
Ask for deposits and, at worst, invoice on the day of completion. The clock starts ticking on your payment terms when your customer receives, or evens accepts your invoice.
#3 Know your customer’s payment process
If you need an order number, know who to ask and obtain order numbers up front before starting work.
*According to a survey by Dept. for the Business Energy and Industrial Strategy, 24% of UK businesses reported late payments as a threat to their survival.
#4 Offer discounts for prompt payment
If your payment terms are 30 days or more, consider offering a 1-3% discount for payment within five days, a much cheaper way of improving cash flow than a loan or invoice discounting.
#5 Protect yourself against bad debt
Regularly credit check existing and new potential clients. That new customer you may have gained a large order from may be a slow payer or in financial difficulty.
#6 Chase debtors
Send timely statements and reminders. Also, a phone call rather than an email to those who owe you money will be more effective. An online accounts system is an excellent way to track and manage your debtors.
#7 Don’t offer your customers extended terms unless you fully understand the risks
They may have cash flow issues themselves, compounding yours. Put repeat offenders on the stop!
#8 Understand your tax liabilities
Approximately 30% of your revenue, takings, and bank balance differs from yours! If a VAT is registered, ensure you keep a tally each month of what your quarterly VAT bill will be. Likewise, plan for any corporation tax or personal tax that is due. A good tip is to set up a second business bank account and continually top this up each month with any surpluses to pay VAT and tax bills. HMRC is usually the first to file for insolvency proceedings due to debts owed by businesses.
#9 Pay your suppliers on time
Ultimately you need to keep a good relationship with your suppliers to continue trading, and on occasions, you may also need to lean on them for extended payment terms.
#10 Have a good relationship with your bank
If your business is seasonal or you know you will have a few quiet months, talk to your bank. They will likely be more supportive, particularly if they can see you manage your business well by having the necessary controls in place.
#11 Asset rich, cash poor?
Only tie up some of your cash in assets; you could rent and lease equipment from cars, vans, forklifts, machinery, printers, photocopiers, and office furniture. Whilst this may seem more expensive, at least you won’t have your cash tied up. There may be some tax advantages too. Outsourcing or using subcontractors may also be more cash efficient than having too many employees on your payroll, giving you flexibility at quieter times or if workloads can be unpredictable.
#12 Turnover is Vanity, Profit is Sanity, and Cash is Reality!
Don’t chase turnover; chase margin!
*The Office for National Statistics (ONS) states that only 45% of start-up businesses survive five years, and 70% of VAT-registered businesses don’t trade past ten years. Several other studies show that 80% of small business failures are due to managing cash flow poorly. If you are experiencing stress due to poor cash flow management, please don’t suffer in silence. We want to offer you a free business health check and a no-obligation chat with one of our advisors where you can confidently discuss your challenges with someone who can provide you with some advice. Find your local advisor here.