Cash flow is a key indicator of a businesses’ financial health. It plays an important role in the success, and the survival, of any company.
David Tindsley, Investment Manager for MEIF Maven Debt Fund, discusses how crucial managing cash flow is for business owners, and how a lack of cash is one of the most common reasons that a business will fail.
The famous saying ‘cash is king’ couldn’t be truer when it comes to cash flow. Staying on top of this critical and complex process is one of the greatest challenges that any small business will encounter. If it is not in rude health a company will soon find it impossible to complete its daily operations. So, given its importance, what steps can a business take to ensure, as far as possible, that its cash flow remains positive?
- Carefully choose who you do business with
Don’t be afraid to credit-check other businesses before you start doing business with them. Credit agencies, such as Experian and Creditsafe, allow you to check out a company online. If the potential new customer has a less than acceptable credit history you might not want to allow them any credit to start with, or even not do business at all. Turning down a potential new contract and income might seem counter-intuitive, but may be better for your business in the long run.
- Be sensible with your payment terms
Make sure that you set terms that are sensible and realistic for your business. Sometimes, often when dealing with much bigger businesses, these terms are imposed on you. Normally, however, whilst offering 30, 60 or even 90 days’ terms might seem a good way of enticing new business, you need to be clear on how that impacts on your business until such payments are received. Also, don’t assume that the invoices will always be settled on time. Unfortunately, late payment continues to be a major cause of cash flow problems, so take this into consideration as well.
- Issue your invoices quickly
Some factors that influence cash flow are out of your hands, but this is something you can control. Don’t put off invoicing or wait to the month-end – do it as soon as the job or sale has been completed. Send your invoices by email – it will get there immediately and will act as a record of it being sent.
- Put together a cash flow forecast
Whilst this might seem to be yet another thing to do when you already have a million and one things to do, it will give you a snapshot of your monthly cash flow and also help you to anticipate where there might be pressure points. This will enable you to take action before the problem occurs.
Don’t be afraid to ask your suppliers/creditors for a bit more time to pay but, once you have agreed a revised repayment programme, make sure you stick to it – they will less inclined to help next time if you don’t!
- Make things easy for your customers
Make sure your invoices are clear and accurate (to avoid any excuses for your customer delaying payment). Always provide your customers with a set of terms and conditions, which should include details of payment terms, delivery terms and any consequences of delaying or not paying the invoice. Encourage your customers to make electronic payments, and make sure your bank account details are quoted clearly. Try to discourage payment by cheque, as this slows the payment process down and provides less certainty of payment initially.
- Keep your bank informed
If you anticipate a cash problem arising, speak to your bank early – they don’t like shocks or surprises! If given enough notice they may be able to assist with a short-term overdraft or increase an existing facility. Your cash flow forecast will help them to better assess the situation, as well as giving the bank more confidence that you are being proactive in dealing with the issue.
- Consider invoice discounting or factoring
Essentially, both these are a means of selling your unpaid invoices at a discounted amount, but getting the cash up-front, rather than have to wait 30 or 60 days for the payment to be received. Such a facility will cost money, but the cash benefits may outweigh the costs.
- Try to keep a cash reserve
This isn’t always easy but, where possible, try to set some money aside in a separate account when monies are received to cover future commitments like tax and VAT.
Not all of the foregoing points will necessarily be relevant for your business, but the key point to always bear in mind is not to ignore problems when you identify them. The sooner that you take action, the more likely it is that you will be able to resolve the situation without putting your business at risk.
Are you looking for funding for your business?
Maven has helped many businesses to get a handle on their cash flow, enabling them to take a proactive approach to doing business. Our MEIF Maven Finance also provides access to funding to help businesses unlock their growth potential. Contact Maven’s local team today to find out more.
Not based in the Midlands? Maven has significant experience of managing regional growth funds across the UK, including on behalf of the Northern Powerhouse and Finance Durham, and since 2009 has invested over £340 million in more than 180 UK SMEs to support their growth strategies.