Managing cash flow can be one of the terrors for a small business, but there are ways to balance money flowing in and out of your business without suffering financial cardiac arrest – it’s about understanding and identifying the cash flow gap, and ultimately reducing the impact of any holes as early as possible. It makes planning ahead for liquidity squeezes easier and reduces dependence on bankers and ensures surpluses can be spotted for investment.
I know I may be stating the obvious, but the quicker you can collect cash, the quicker you can pay your own bills and pursue profits. As an SME there are some key steps to follow which can help to speed up cash flow.
1. Conduct credit checking procedures
Most businesses extend credit to customers, viewing it as a key tool for attracting new ones, however the risks are high – the longer a customer takes to pay, the greater the chance that they will never do so. Your debtors are key to managing cash flow and poor credit management can seriously undermine any other efforts you make to keep the flow of money in and out manageable. Try to reduce the risk by conducting some basic credit checking procedures. Rather astonishingly, the analysts Dun and Bradstreet estimate that 90 per cent of companies grant credit without a reference. The obvious major risk of this omission is ending up with ‘can’t pay, won’t pay’ customers. A full credit report reduces the risk of that nightmare by giving details of company results, county court judgements and a recommended credit rating. A belt and braces approach to reducing the risk of rogue debtors would also include taking out credit insurance.
2. Reduce buying time and invoice earlier
The most basic approach to cash flow management is to reduce the time it takes customers to buy; after all, without customers there is no cash flow. Likewise, once you have customers on board, the most obvious next step is to consider invoicing earlier; the earlier you send it in the faster the payment will be received. Learning payment cycles of your debtors helps to reduce the collection period; knowing when to send across invoices to meet the next payment run can be invaluable.
3. Streamline the ordering process
Streamlining the ordering process by making it easier for people to buy your goods or services is crucial for smooth cash flow. For example, accept internet payments and orders over the phone.
4. Do not give customers an excuse to delay payment
You will often come up against internal delays such as administrative errors on the invoice or otherwise but don’t give customers an excuse to delay payment.
5. Send reminders
Aim to remind customers for payment a week before payment is due and send statements as a further, gentle nudge. If required, there is no harm in reminding the buyer that they have a credit limit with you and supply will stop if payment is not received!
6. Review your methods for receiving funds
Ensure payment collection is as efficient as possible. For example, BACS is much faster than a good old fashioned cheque – even if customers pay on time, how they pay can have an impact on cash flow.
To ensure cash flow is monitored and managed a cash flow forecast is essential – of course, all journeys need maps and running a business has its own equivalent. At a basic level these let you identify gaps but they are also vital if applying for financial support. I would recommend a 13 week rolling cash flow forecast – updated weekly – to keep on top of the issue, with annual rolling cash flows updated on a monthly basis. The forecast needs to be comprehensive and consider a sales forecast, anticipated cash outflows and inflows with a cash flow bottom line.
Cash flow is often a challenge for SMEs, but it is one that can be managed – considering the above steps, having full visibility and taking responsibility all help to alleviate the pressures associated with a poor cash flow. For UK SMEs, there really is no need to be terrorised by cash flow.
Mark Moore, Commercial Services Director, Ingenious Britain