smallbusiness.co.uk: Helping your business think big

Late payers, cancelled overdrafts, and extreme lending terms have led to some of the worse trading conditions in over a decade, and the suspicion is that next year isn’t going to be much easier. Read part one of our guide on how to ensure a steady cash flow for 2010.

Plan your cash flow

It sounds ludicrously simple, but the failure to plan ahead for incoming and outgoing costs remains one of the primary causes of company liquidations. Craig Mackie, managing director of graphic design company The Shine, realised his business had truly lost its lustre when he couldn’t afford to pay a £60 invoice. ‘The penny dropped that I had been thinking about my cash flow on a day-to-day basis rather than looking six months ahead,’ he says. By scaling down the company and implementing strict financial planning, Mackie was able to bring his business back from the brink. ‘Now we have spreadsheets that detail all our invoices and will indicate if we have a problem in 14 weeks’ time, rather than just realising when it’s too late to take action.’

Talking tough with your landlord

Paying three months’ rent upfront can be a huge drain on cash flow. Graeme Marsh, managing director of personal fitness business Aegis Training, eased his company’s cash flow by arranging monthly payments.
‘Our landlord was very sympathetic and realised we were in a difficult position, so was prepared to make some concessions.’

Bring out the scalpel

‘If you’re experiencing turbulent times, cut early and deep,’ says Paul Daniels, director of Involved Investors. ‘There’s no point in just chipping away at the workforce. You can always rebuild at a later point. We had to cut our sales team by nearly half last year, which was the appropriate move. Now things have started to recover, we have been able to build it up again.’ Obviously, this isn’t so easy if you’ve already made massive cuts and are almost running on empty.

Don’t believe the banks

Carol Hack, owner of property development company Clearwater, suddenly had her bank funding pulled earlier in the year, leaving her with £150,000 of bills to settle. ‘There was nothing wrong with the company. Despite the recession, our holiday homes were selling really well and we were very profitable. They just panicked and wanted to reduce their exposure in the property sector.’ By doing a lot of research, Hack secured alternative funding. ‘We found a Swedish bank that was prepared to back us because we had a squeaky clean credit history.’

Community care

If obtaining bank funding is simply not an option, check out the Community Development Finance Institutions. There are more than 60 of these organisations in the country, providing loans and support to viable businesses in need of funding.
 
Hound debtors

A recent poll by advisory firm Tenon Recovery found that 70 per cent of
entrepreneurs are chasing debtors more vigorously to get money in. Edward Rimmer, chief executive of Bibby Financial Services, says companies should check that all their invoices are raised on time, with the correct terms and conditions in place. ‘Call up and confirm the client was satisfied with the work, as this is the most common excuse for non-payment. Once an invoice has been sent, call the client again and check there aren’t any disputes. Putting in all the admin work and making sure everything is in order is essential for preventing any problems.’

Study the ledger

While not the most thrilling of jobs, it might be worth checking to see whether suppliers have been paid twice. Duplicate payments aren’t as uncommon as you might think.

Check credit status

Having been burnt by bad client debt last year, Dave Breith, director of O-bit Telecom, says credit checking is now an integral part of his cash flow management process. ‘You really need to look out for the early warning signs. When people start asking for extended credit terms, you need to ask why. Earlier in the year, we refused to do any more business with certain companies that had outstanding payments with us until the amount they owed us was paid. In the end we lost the money, but we did reduce our exposure as one of those companies went bust.’ Breith now uses a credit-checking service as a way of ensuring that clients are able to settle their debts. ‘You don’t have to spend a fortune on credit agencies; you can do it all in-house with systems available through agencies such as Experian,’ he says. David Thompson, chief executive of Close Invoice Finance, agrees: ‘Make sure you do your research on who you are selling to, as bad debt is a major reason for companies falling into cash flow difficulties.’

Call in the heavy mob

Using a debt collection agency might be your best option if you are failing to recover outstanding payments. Stephen Lewis, former president of the Credit Services Association, says, ‘It’s something companies should think about using when they have exhausted their in-house procedures for chasing debt but don’t want to resort to legal action.’

Use freelance staff

James Blackburn, co-founder of energy consultancy Carbon GC, has found it useful to have a core of full-time employees while also using freelancers. ‘It’s really helped free up a lot of our fixed costs.’

Maximise value

The benefit of invoice finance is that it provides cash flow facilities against your outstanding sales ledger. Close Invoice’s Thompson recently enabled an alcoholic drinks company to receive funding through this facility. ‘Their profits were up but they needed to fill the gap between making sales for Christmas and receiving payment. Invoice financing provided a cash solution that would have been difficult to obtain through the bank,’ he says. Most invoice providers will advance you 80 to 85 per cent of the invoice value, with the remainder paid when the order is met. The majority of invoice finance providers will want all or the lion’s share of your invoices for a 1 to 2 per cent cut and an arrangement fee. Moreover, an invoice factoring company will also chase debtors on your behalf, effectively outsourcing your credit control.

Lighten the load

Release the cash you have tied up in
un-shifting stock, says Andrew Duncan, partner at consultancy Bridge Business Recovery. ‘I often go into companies and find they are carrying far too much stock. It’s important to look at your whole supply chain management. If you’re holding items in June that you’re not going to sell until Christmas, renegotiate with suppliers.’ Duncan adds that it’s crucial for managers to start making their firms as efficient as possible: ‘2010 is going to be a tough year. It’s time to cast a critical eye across your entire operations.’

R&D tax credits

If you have invested £10,000 or more in certain types of technology, you could be eligible for enhanced tax relief through research and development investment, or money back in tax credits.

Pastures new

Robert Forbes, owner of Plutus Wealth Management, opted to move into a serviced office as a way of saving cash and spreading his outgoings. ‘If we went down the leasing route then we would have had to pay around £40,000 in equipping the office and another £20,000 hiring a receptionist. This way we’ve saved tens of thousands of pounds. It has also meant that we don’t have big lumps of cash going out every quarter – which has been really useful.’

There are currently no comments on this article