Cashflow is king. How to keep a better grip on small business finances

by | Jan 20, 2019 | Business

There’s been an 8% increase in the amount of money owed to London based SMEs due to late payment of invoices. It’s nothing new. SMEs have always had issues collecting outstanding sums of money from their clients. But that’s a big increase! And, when set against continuing uncertainty in the UK, cashflow problems can cause a real headache for business owners. Here’s a few tips on avoiding the worst of it…

Is late payment the only cause of your cashflow problem?

Respondents to a recent survey reported late payment of invoices as the biggest cause of cash flow problems. But this can often be more of a symptom than a cause. If you have a cashflow problem and an aged debtor list as long as your arm, the first thing to do is to think strategically. Why have you got a problem?!

I often sit my clients down do a force field exercise: to examine the issues methodically and create effective ways to deal with them. For example, is it due to dissatisfaction with a product or service? Is there an issue with sales? Do they have the right systems?

Such an exercise leads to an understanding of their business and to continuous improvement.

Forecast is forearmed

Another reason for cash flow problems is businesses don’t do a cashflow forecast. Without the planning, it’s very difficult to appreciate your cash position. And you’re also unable to consider how much of your sales revenue you’ll receive later than your standard terms dictate.

Because it’s happened before – you’ll have a good idea who the likely culprits will be – and by having a cash forecast, it means you can budget for it.

Understand the cycle

A cashflow forecast is the tool you use to predict when you might have problems. It starts by understanding the sales cycle and the purchasing cycle. It also ties in with producing a profit and loss account forecast: another essential management tool.

And a cashflow forecast will be important if you want a loan or and increased credit facility. You’ll have to produce this sort of forecast to your bank so they’re comfortable that you’re managing your cash flow and working with a robust and accurate forecast.

Avoid the problem in the first place

The best way for small businesses to avoid the problem of late payment of invoices is to prepare for it.  One of the best ways to do that is to set and agree terms, particularly at the beginning of a new business relationship. By agreeing terms – and what will happen if a customer breaks these terms – you can avoid misunderstandings. As part of your due diligence and new customer set up, you may also consider running credit checks on all new customers and tightening your terms if required.  These measures should all be part of your credit control system.

Use your accounting software

Most decent accounting software packages will allow you to put in credit restrictions or credit limits on a sales ledger. This means that if your client is in over their credit allowance, there’s an opportunity to have a conversation with them. To flag that they’re beyond their limit and that services or products will be withheld until they pay their account. It can also pass the message on to your sales team that there’s to be no more active selling to that client for a set period of time.

May you live in interesting times…

Sometimes your terms can include things like charging interest on late payments. But you should be careful with this: you could find yourself spending more time and money trying to calculate interest and controlling it than you’ll receive in payments…

Discounts and factoring

Invoice discounting and factoring are also an option. Invoice discounting allows you to send an invoice, and still deal with the credit control. But a funding company will have advanced you a proportion (say 70% or 80%) of the amount due, which you can repay when your customer pays you. Though you’ll be charged interest and a fee.

A factoring company is similar, but they also take over the credit control and your client pays them.

In both of these instances you get paid upfront. This practice isn’t unusual but it can be expensive. It can also be intrusive to have a third party involved in your business and this can have an effect on your relationship with your customers.

Understand why your customer is paying late

With money comes emotion. It’s easy to become frustrated and emotional when things start to go awry.  If late payment is becoming an issue then it’s possible that your relationship with your customer has become strained and some of the trust has gone.

But there’s always a reason why someone hasn’t paid you. And it’s important to understand that reason. It’s usually one of the following:

  • They can’t pay
  • They’re unhappy with your product or service
  • They won’t pay

The fact is it’s very rarely the latter! Quite often your customer will also be waiting to be paid: it can sometimes be a vicious circle. And if they’re unhappy with what you’ve provided them with then it’s in your interest to understand and address their issues as quickly as possible.

Either way, taking steps to understand the problem will allow you to make the right decision about how best to proceed. You’ll have taken the emotion out of it and can go back to having adult discussions about a resolution.

Outsource the lot of it

Sometimes the best solution is to realise that credit control and invoice control and the whole of your back office accounting just isn’t your strong suit. Chances are as a small business owner your time will be much better spent doing something that will add value to your business. More sales, more clients. More world-class delivery.

In that instance, perhaps it’s worth outsourcing?

One big advantage is that you’ll get higher levels of objectivity. You’ll have professionals who aren’t emotionally involved and who can follow your credit control procedure dispassionately to get the results. Whilst they’ll be polite and courteous they won’t be fobbed off with sob stories and excuses!

It’s something to consider if your business doesn’t have its own finance department and you don’t have the time to chase debts.

And we can help. If you want to understand the real reasons behind your cashflow problems or you’d just like a professional to take the strain of managing your credit control just get in touch. Give us a call on 0208 238 8730 – we’d love to hear from you and have a chat about how we can help you move your business forward.