Cash flow will be the difference between success and failure this year. Here are ten top tips for ensuring your business stays in the black

Cash flow will be the difference between success and failure this year. Here are ten top tips for ensuring your business stays in the black

1. Conduct credit checks

Creditworthy customers can initially be hard to spot. Scott Nursten, MD of security systems provider s2s, uses an online service to keep an eye on the credit status of clients. ‘If anything happens to a company, like a change in directorship or an address, or its credit rating slides, our accounts department gets a warning email straight away,’ he says.

2. Acknowledge the problem

If sales are drying up and debtors continuously trot out excuses for late or non-payment, you need a contingency plan.
Evette Orams, a director at Hilton-Baird Financial Solutions, agrees: ‘The real mistake is to act too late. There is so much negative press about the credit crunch that people don’t know what to do.’ Often, a business can be its own worst enemy. ‘We have come across situations when orders have sat on a desk and the invoices haven’t been raised,’ says Orams.

3. Secure favourable payment terms

Nursten at s2s has negotiated the extension of the terms for paying some suppliers to 45 days. ‘Technically, we haven’t needed it as we haven’t been in trouble, but as we’ve adjusted terms for our customers it makes sense to speak to suppliers. It gives us the necessary breathing space – what you don’t want to do is wait until you can’t pay your suppliers and then call them to say there’s a problem.’

4. Don’t overtrade

Ambition can be as much the undoing of a business as the making. Hilton-Baird’s Orams says: ‘In the current climate, owner-managers are mistaking profit for cash flow, thinking because they’re profitable, everything is okay.’ Andrew Duncan, a partner at Bridge Business Recovery, recommends that companies ‘concentrate on existing clients. Going for new business may not be the answer as you may win a new order without being able to fund the capital cycle. Overtrading is a big problem for many businesses.’

5. Forecast your cash flow

Examine your working capital cycle and reconcile the debtors and creditors on your bank statements; decide exactly what payments should be coming in and going out. ‘You have to create decent, robust forecasts to identify what the critical payments are,’ says Stephen Fern, a director at turnaround firm LC Corporate Strategies.

6. Remember the essentials

There are certain organisations you don’t mess around with, not least HM Revenue & Customs. Likewise, paying utility bills
is probably a wise move. Prioritise the balances that have to be settled to keep your business viable. ‘Be forward-thinking in your discussions with the HMRC. Don’t hold off on telling them about your financial situation if you are going to struggle to make payments,’ says Fiona Hotston Moore, managing partner at accountancy firm Mazars

7. Order on demand

Horror stories abound about seasonal businesses getting caught out after over-ordering stock. Richard Sanders, a partner at Catalyst Corporate Finance, notes that ‘in many cases, 80 per cent of sales are derived from 20 per cent of the product range’.
If cash flow is tight, analyse the inventory and sell or offload what you don’t need. Moreover, conduct a cost check of suppliers to see whether items can be sourced more cheaply.

8. Hock your wares
 
Desperate times call for desperate measures and that’s causing a resurgence in pawnbroking. Paul Aitken has set up Borro.com, which allows people to get a quick cash fix against goods. He says owner-managers, consultants and city financiers are queuing up to put their goods into hock. ‘They see it as a short-term solution to a payment issue while in the process of restructuring their finance,’ claims Aitken.

9. Invoice accurately

Mess up an invoice and you’re giving your debtor a gilt-edged excuse to delay payment. Bridge’s Duncan recommends a follow-up call as soon as an invoice is sent to confirm its accuracy. ‘This means you can chase the debt properly without any dubious queries being raised at the last minute,’ he says.

10. Diversify

In an ideal world, you want a spread of clients across a range of sectors. The nightmare is to rely heavily on one or two clients who then revise their budgets and pull the plug on you – or can’t actually pay up. Nursten agrees: ‘What we have tried to do is steer clear of verticalisation [focusing on a specific sector] for as long as possible. Thankfully, we haven’t targeted financial services even though we are a security business.’
 

See also: Keep your cash flowing over Christmas

Related topics: Managing cashflow