Cash flow management is vital to all companies; without enough funding to continue trading, a business’s days are numbered. There’s often such a focus on profitability, particularly within start-ups, that directors often take their eye off their company’s cash flow. Profitability won’t necessarily prevent cash flow issues, so it’s imperative this is managed carefully.
Ideally, companies will have robust systems in place to help manage, predict, and control cash flows to deal with any potential shortfalls. Existing accounting software and other third-party applications can help with this and whilst all businesses are run differently, below are some key points that may help.
- Credit terms
Businesses will generally have credit terms with both their clients and suppliers. Depending on your business, you may have clients paying you up front or at the point of sale, but often you’ll need to give them a timeframe to make payment. This will also be true for suppliers.
Ideally, you’ll always want to agree shorter payment terms with your clients than those you have with your suppliers to ensure positive cash flow and thus maintain a healthy cash balance.
- Overheads and larger payments
All businesses will have costs that cannot be delayed but can be planned for. Outflows that may come under this will be salary costs, stock purchases, corporation tax and VAT to name a few.
You should be able identify these monthly amounts and plan accordingly. To do so, we recommend having your financial records kept up to date on a monthly basis so that you can forecast accurately.
For stock, it is always best to keep an eye on current inventory levels so that you can determine when the next batch will need to be ordered and paid for. In this instance, we would recommend only making a deposit payment with your supplier once the stock has been shipped. If not, there may be a significant lag between the time cash has left your account and when you can start receiving cash on the sales made.
Regarding overheads, the largest costs for businesses are usually salaries and rent. Typically, these can be predicted accurately and so it is always a good idea to identify this in advance so you can plan how to use your cash each month.
- Large projects and commitments
Some companies may undertake large projects for their clients which consume substantial resources. This may be for staff costs, materials, or deposits all of which can result in a significant amount of cash being swallowed up.
To combat this, it is recommended that you ask your client to provide a deposit and make payments in instalments to cover different stages of the project.
You may also have an initial budget in place for the project, however there is always the potential for unexpected problems along the way. Therefore, you should always track what costs are being incurred and paid for versus your budget so that you can manage your cash accordingly and request additional payments from your clients if required.
- What if scenarios
Most companies are in business to make money, however there may be times where sales quieten down or an event outside of your control means that everything is flipped on its head. Because of this, we advise that businesses generate “what if” scenarios to determine worst, base and best case scenarios. In doing so, this allows decision makers to determine at what point their business will require additional funding or reach its overdraft. Knowing this will help the business understand what they need to do (i.e. reduce headcount, request deposit payments, reduce client credit limits, etc.) to ensure they have enough cash to keep trading.
- Credit control
An area that can certainly be time consuming and frustrating from time to time, but nonetheless an important function for any business, is credit control. Unfortunately, every business will have clients that are late in making payment and it can be a fine balance on when to chase them and when to provide some leeway. Below are some ways to mitigate this and reduce the credit control burden:
- Request a client to set up a standing order
- Set up a direct debit scheme for your clients to sign up to (e.g. GoCardless)
- Ensure you have the correct client details on their invoice (i.e. registered company name, PO number, accounts payable contact details, etc.)
- Reduced credit limits for new customers
- Reduce payment terms for new customers
- Plan your invoicing ahead of holiday periods such as the summer or Christmas
- Add interest charges to deter late payment
- Provide incentives for early payment (i.e. a discount)
- Cost control
Here is a list of a few simple things you can do to manage and reduce your expenditures:
- Negotiate/shop around for best prices
- Consider second-hand purchases, particularly for capital equipment
- Remove inefficiencies – for example, laborious paper-based systems for computerised ones
- Aim to hold the right amount of stock – you do not want to be in the situation whereby you hold too much stock at any given time as you run the risk of holding obsolete items
- Hire purchase or lease an asset to allow you to spread the cash payments over a longer period
- Reduce staff headcount/hours worked by employees
- Reviewing your balance sheet
As mentioned in point 2, it makes sense to have your financial records up to date in a timely manner. One of the many benefits of this is it allows a business owner to fully understand the financial position they are in. Your balance sheet is a summary of the assets that you own and the amounts you owe to creditors (amongst other liabilities). Crucially, this allows you to view your net asset position which is often a great indicator of the health of the business.
- Get in touch with Leap!
If you feel you need a helping hand when it comes to your cash flow or anything else, please do not hesitate to contact us at firstname.lastname@example.org.
The Team at Leap Accounts & Outsourcing