Avoiding Cash Flow Problems

Most business owners will be familiar with the phrase ‘turnover is vanity, profit is sanity but cash is king’. It is unclear who the original author was but that doesn’t negate its truth. Statistically most business failures are due to cash flow problems.

More correctly, poor management coupled with bad cash controls lead to cash flow problems. The end result is not having enough money available to pay what must be paid at the time that it must be paid. From here it can be a short step to severe creditor issues and unpleasant subjects such as insolvency and administration.

So what can a business owner do in order to avoid the nasty surprises associated with an absence of cash at a critical time?

Here are some pointers designed to give a business good cash controls and therefore problem free cash flow:

• Own it. The business owner/Managing Director must take ownership of the financial functions and this includes the area of cash control. This is an attitudinal issue, delegation is fine but abdication is not. The survival and well being of your business is at stake, you must view it as a priority that forecasting systems, monitors and controls are in place that deliver a well managed finance function.
• Be holistic. View financial and cash controls as an integral part of running a successful business. Take time to understand how the availability (or otherwise) of cash is both influenced by, and influences, the P&L, the marketing plans, the new product development schedules, the planned acquisition as well as your ability to pay staff, VAT and corporation tax!

• Be proactive. Influence the future rather than just react to the present. Take control and manage your cash on a daily basis. Look three months ahead to avoid cash “speed bumps”. Exactly what cash is planned to come in and go out, and when will this happen? Reconcile the cash movements with your bank balance; a cash flow forecast is essential for any business.

• Be firm with yourself. Avoid over trading. That big order may look enticing but before you accept it ensure that you can finance it. The cash flow forecast will assist in suggesting phased solutions or the scale of any funding requirement. Be prepared to go back and re-negotiate (or even decline) a potential order rather than destroy your business.

• Make it easy for others to pay you. Huge amounts of time are spent dealing with queries and associated late-payments are often simply due to time lost sorting out errors on invoices.  Get your invoices right first time; send them to the right person at the right address, include all the relevant information, reference the correct purchase order number, make it clear when payment is due and use the agreed currency.

• Time is of the essence. Send out your invoices in a timely manner, do not wait until the end of the month to do them all in one batch.

• Use technology. Electronic invoices and payments don’t get lost in the post. Do your customers and suppliers want a piece of paper or would they prefer the electronic transferring of information?

• Be clear. Make sure that your Terms & Conditions of Sale are what you need for your business with title being retained until full payment is received.  Ensure that all customers receive and agree to your Terms & Conditions of Sale.

• Manage debtors. If it essential to give credit to customers then put in place the mechanisms that ensure bills are paid on time and avoid you financing everyone else’s business. Hold a regular debtors meeting to review all outstanding invoices and put in place a routine for chasing them.

• Manage creditors. Pay what is due when it is due; know what payment schedules you are agreeing to at the time of taking on the commitment not afterwards. Early or late payments should happen for a reason.

• Separate accounts. VAT and other routine payments can be alleviated by operating a separate deposit account. Feed cash into it every month and take it out when required.

As ever, if you would like external perspective or help on any of the above, do get in touch or book a free business help session here.