Small Business Advice | How to effectively manage your cashflow

If you’ve ever run a business of any kind you’ll know that it’s cashflow, rather than content, that is king.

No matter what business you are in it’s imperative that you get a handle on this quickly. Failure to do so could end up costing you big time. I know so many people that have had great business plans and ideas that seemed perfectly workable, only to fail less than six months later through cashflow problems. Once you start to suffer from these and take your eye off the job in hand it can really start to affect your mindset and consequently your business. A lack of coffers in the bank will cause you untold amounts of stress and perhaps just as significantly alter your attitude to bringing in new deals. Once that positive mental attitude starts to go then you really are in trouble.

While much of this can be put down to bad cash management and a lack of planning, this isn’t always the fault of the SME itself – several other factors may play their part.

There’s nothing more frustrating as an SME than fulfilling your end of the bargain and doing a good job for someone within set parameters, only to be made to wait an unreasonable amount of time for your invoice to be ‘processed’ or ‘put through the system’.

The longer you are in business, the more you’ll grow to hate the accounts departments that tell you this. After all, if you’ve done the work you so you want to be paid, right?

There are, of course, several ways to approach managing your cashflow.

The accountants out there will typically tell you to define clear payment terms, invoice early, chase up late payers quickly and organise a good buffer overdraft with your bank.

However, before you even get there is something else you must think about which many even fail to consider. Does your client even have the money to pay you? Are they who they say they are? While this may sound silly or a little bit over the top it is something you must think about. After all, it’s no good doing work for a company only to find out that they have insufficient funds to pay you because they are experiencing financial problems themselves.

There are several ways you can do this. If they are a limited company you can check their status on the companies house website while other sites such as Equifax can help you make informed decisions on the potential risks involved. Where this is not possible you can ask for several references from other people that the company has previously delt with. While this can feel awkward, you should remember that this is something all large corporations do on a daily basis and you should explain that this is just part of your due diligence process.

The next and most obvious thing to do is to invoice early or attempt to get some of the work paid for in advance as this will take the pressure off you a little and can help foster better long-term relationships between both parties. After all, where large investments of both time and money are required from the SME upfront why shouldn’t customers be prepared to take some of the defined risk themselves? There is a school of thought that also says good, honest clients who don’t have problems with paying won’t mind paying a deposit for your services.

However, there is a distinct possibility in some industries that this may not be possible. In this case make sure you get the invoice out the door when goods are shipped or services completed, and make sure it contains the date and clear payment terms.

These should also include a clause for late payments at the bottom in an effort to speed up the process. Although you may not realise it you already have some protection in the form of The Late Payment of Commercial Debts (Interest) Act 1998 and Late Payment of Commercial Debts Regulations 2002 which gives businesses the statutory right to claim interest on late payments from other businesses. Be sure you also include something in the small print about processing constituting agreement with your terms. Better still, have your solicitor draw up a standard contract for you to get clients to sign upfront. In the meantime you may find this useful.

The flipside of this is making clients aware that there is a discount available for early payment or long-term contracts. Getting those retained clients onboard will improve both your sanity and bank balance. How about giving a between 3-5% discount for payment within 10 days or offering an attractive reduction to those who commit to a campaign with you?

So far we’ve talked about how to keep the flow of money coming in to your business, but there is another aspect which many SMES fail to consider and this could significantly improve both cashflow and your chances of survival. While you may be taught from an early age to stay ahead with bills and pay these as early as possible, you should try to unlearn all that you have learned and get out of this habit, retaining the money within your business for as long as you can. This means never paying a day sooner than you really have to unless you too are getting a discount for doing so. For your own employees think about them using their own credit cards or business credit cards that you issue yourself.

If this last bit is beginning to sound a tad hypocritical do remember that these are the tactics that many other well established and successful businesses are deploying to control their own cashflow. This will also help you to put things in perspective and drive your business forward without taking things too personally.

Next time we’ll take a look at factoring and how it could help you.


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