Having good cash flow management is crucial to running a successful business, some of the most established, profitable businesses have been known to fail because when the business most needed it, the cash wasn’t available.
So, what is cash flow?
Cash flow is the amount of money coming in and going out of a business. To have a positive cash flow, you need to be generating more money coming into the business than you have going out.
Sounds simple, right?
Wrong! The Office of National Statistics has found that up to 90% of business failures are caused by cash flow problems.
Below, we’ve put together some helpful tips on how you can effectively manage your cash flow during those tough times.
Undertake an audit
It’s amazing how many businesses don’t know the full extent of their finances. Many business owners get so engrossed in running their business and providing products and/or services to their customers, that the financial side of the business becomes neglected.
Take some time out to undertake a thorough audit of your business’ finances, this way you will know exactly what is coming in and what is going out. Only once you have a clear picture of your finances, will you know the extent of the problem and whether it is manageable. The audit will allow you to create an effective plan on how to turn your cash flow around.
However, if the audit uncovers serious cash flow issues, it is important that you seek independent advice as soon as possible. Trading with the knowledge that your company is insolvent can lead to some very serious implications. If you think this may be you, contact our sister company My Insolvency for honest advice about your situation.
Challenge late payments
Late payments have a huge impact on cash flow, especially for SMEs, as it can be the difference between continuing to trade and shutting up shop. We have reported on many occasions that UK SMEs are chasing a staggering £50billion in overdue invoices. Add to that a further increase due to the current pandemic and it can make for some pretty grim reading.
So, what can you do to protect your business from late payments?
Ideally, it is a good idea to credit check any new customer before you begin any work, to ensure they are in a position to pay you. If any issues are raised during this, you could request that the customer pays for your goods and/or service in advance.
To avoid delay, ensure all of your invoice have the correct information and are sent immediately after work has been completed. If payment dates are missed and were clearly stated in your contract/terms of business, don’t be afraid to follow up with your customers and push for them to honour the original agreement.
If payment is late, don’t be afraid to escalate the matter. Your escalation process should clearly state what will happen should they fail to pay. This can include things like late payment fees, interest and at what point you would seek to pass the account over for collection.
It can be useful to understand your customer’s payment process as some businesses have set payment frequencies. For example, if you send invoices that don’t fit within their payment cycle, you run the risk of always receiving delayed payments. So timing is key to ensure your invoice is paid on time.
You may be required to adopt a sterner approach with consistent problem payers. Some people think this will ruin the relationship with the customer but at the end of the day, you have provided a product and/or service so you deserve to be paid for it.
Don’t shy away from having an open conversation with your customer about the issue, failing to approach the subject will only lead to further delays. It could throw up potential financial problems that your customer is having so allows you to negotiate a short repayment plan that suits both parties.
The key to dealing with late payments is communication, communication, communication!