smallbusiness.co.uk: Helping your business think big

Smallbusiness.co.uk has some top tips for start ups on how to manage their cash flow smartly

There are two fundamental goals at the heart of improving your cash flow: control your expenditure and regulate your income. To that end, there’s a raft of clever tactics and useful services that can help smooth out peaks and troughs:

1. Chart of accounts

It may sound boring but the first step to good cash flow management is to understand the flow of money through your business. For that, you need accurate, up-to-date information. Whatever your size of business, you should be routinely receiving a regular stream of data about your numbers –debtor books, budgets and cash flow forecasts should be at your fingertips.

2. Combat seasonality by diversifying

All businesses have fluctuating levels of income and expenditure, which can play havoc with cash flow if not properly managed. For businesses where demand for goods and services is affected by seasonality, this often means they face their greatest costs during their quietest period. And it’s not just Christmas cracker makers or Easter egg producers that are affected by annual highs and lows.

3. Establish debt chasing procedures

Credit control and debt recovery are vital pillars of good cash flow management. PricewaterhouseCoopers (PwC) research indicates that nearly one in five companies regard current debt levels as the ‘biggest threat’ to survival. Julian Roberts, director of PwC’s receivables management group, urges, ‘It’s a good idea to establish a structure to the debt chasing procedure.’ He recommends that follow-up calls take place after a certain interval, invoices are re-issued a limited number of times and if that fails, a more serious course of action kicks in. The longer a debt remains unpaid the harder it becomes to collect.

‘If your customers are on 30-day payment terms, someone has to call on day 31 and ask where the payment is if it hasn’t arrived. If you don’t do that, you immediately weaken your position,’ says Jeff Macklin, co-author of Finance on a Beermat.

4. Understand customers payment cycles

Many of your clients will have set dates in the month when they pay invoices, so it’s a good idea to incorporate that into your credit control system. Otherwise, if you miss a customer’s cheque run you might have to wait another month and that directly affects your cash flow.

5. Invoice accurately

Research from PwC found that around 85 per cent of the reasons given for non-payment by business customers relate to invoice queries or poor administration. It’s essential to get the basics right, such as invoicing the right amount and sending it to the right place.

6. Use a third party to collect your debts

If all else fails and your cash flow is suffering as a result of large quantities of cash tied up as unpaid debt on your books, consider outsourcing the work to a collection agency. Although they have a mixed reputation, figures from the Credit Services Association (CSA) trade body indicate that its members recover up to £5 billion each year. ‘Don’t pick a collection agency randomly from the Yellow Pages. Only use one you know yourself or one recommended to you,’ advises Macklin.

7. Customer credit history

It’s a good idea to credit check customers in advance and continue to monitor their payment practices throughout your business relationship. One way is to purchase status reports from credit agencies. These include full customer details and financial results along with the payment experience of other suppliers, county court judgments and a recommended credit rating. Ultimately, PwC’s Roberts urges businesses not to throw good money after bad. ‘If they’re a good purchaser but a bad payer you have to think about whether you want to continue dealing with them.’

8.  Clear terms and conditions

If an agreement to terms and conditions forms part of the grounds on which any deal is struck, it avoids misunderstandings and strengthens your ability to collect any outstanding amount later on. Macklin says: ‘Make it clear that you’re not just selling something, you’re also agreeing with the buyer what and when he’s going to pay for it.’

9. Cut costs and spread payments

Put simply, you can improve your cash flow by not purchasing items unless they are business critical and you can spread the payment rather than taking a lump sum out of your cash flow. Hire purchase and leasing can be used to fund a range of items these days, including new and used cars, light commercial and heavy goods vehicles, plant and machinery, office furniture and computer equipment.

10. Contra your goods and services

For many businesses, product inventory increases while cash flow decreases, but bartering gives you the opportunity to turn your spare capacity or inventory into value by giving your business purchasing power when you need it.

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