Cash flow problems can cripple a small business. 2018 BACS Payment Scheme research found that almost half of UK SMEs are being paid late, at an average delay of 72 days. That represents £26bn owed to businesses who need it to stay afloat.
How do you prevent late payments causing you major problems? Effective cash flow management.
The thrill of sales can lead to poorly managed cash flow – but you can avoid this and keep your cash flow management in check by adjusting a few key processes:
Clear contract terms
Define contract and payment terms with each client before you do any work. Clearly setting expectations up-front can prevent any difficult conflict later on if there are complications around payment.
Invoice on time
If you are late to issue invoices, you can’t blame clients for paying late. Make sure you have an efficient system for getting invoices out the door. There are lots of software packages that will take care of this for you.
Track payments
This is where a good accounting software package can really come into its own. It lets you know payments are missing before it’s too late, and helps you create professional invoices and follow-up templates. You can do all of this manually, but it soon becomes time-consuming and you’re more likely to miss things.
Credit limits
Not all customers have the same financial strength. You need proper checks in place before you extend credit terms. It might seem like good service to avoid this, but bad debts can set your business back and put you under pressure.
There are lots of online services that allow you to view commercial credit reports on potential customers so you can assess the credit and cash flow risk to your business.
Cash flow forecasting
Small business owners often think that tools like cash flow forecasting are overkill and best left to the bigger companies. But they’re useful no matter how few sales you might be making.
Software packages with forecasting tools let you anticipate where money is tied up in the business. Then you can make small tweaks that could ease your cash flow woes – for instance, a small discount for a large contract to be paid within 7 days instead of 30 could make all the difference for you.
Have some cash in reserve
If things are going well, it might not seem necessary now. But some cash tucked away for a rainy day is always useful. Try the simple 1/3 rule: one third for taxes, one third for dividends, and one third left in the business.
Manage growth carefully
When expanding rapidly, you might spend money quicker than you can recover it from your debtors. This is called over-trading. If it suits your business model, you might consider staged payment schedules to even out the cash flow during this time.
Consider a loan
A working capital loan, typically a term loan, can give you the flexibility to take advantage of new opportunities, bridge short term funding gaps, or invest in new products or services. Just make sure it’s definitely the right option for you.
Consider invoice finance
No need to wait for invoices to be paid. Get a high percentage of the invoice value advanced as soon as you raise the invoice. Beware that some providers attach long contracts to these agreements which would require you to sell your debtor book for the agreed time period.
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