Growth Sucks Cash – Ideas To Tame The Monster
No matter how profitable you are or how your business model might be the best out there or even how many outside supporters and investors you have interested in your business; if you’re not able to manage your cash flow successfully, your company will not survive.
In particular, as your business grows the demand on cash increases as you need more money for more stock, materials, wages etc. Here are a number of steps that we feel are the best way to manage your cash flow.
No, we don’t mean on time work (though you really should be!), we mean be punctual with issuing your invoices. If you don’t invoice promptly and on time, why would you expect the invoice to be paid promptly and on time? One of the major issues for cashflow and SMEs is that gap between sending the invoice and having the invoice actually paid. The only way to combat this is to invoice your customers as quickly and efficiently as possible and continue to follow up with it if the number of days for payment lapses. There is specialist software on the market that can help you manage, send and follow up with outstanding invoices in the easiest way possible. Is this the better way to go for your business?
For new customers, set it out in clear language of what they expect of you and what you expect in return, ie. Setting clear payment terms.
Do you have a plan?
Your business will never succeed if you just stroll through your business life, week to week, not knowing where money is going out, when money is coming in and not seeing the bigger picture. What you need to do is forecast. Set out a plan of the expected incomings and outgoings of the company over a period of time – ideally 12 months. This will give you a firm grasp of where your company is at currently, and where you forecast it to be in 12 months.
Optimism can be the downfall of many an entrepreneur. Be realistic in your forecast. Base your forecast on historical evidence and real numbers.
This major perk of forecasting, is that you will be able to tell in time if there will be a shortfall any month, whether that be from outstanding invoices due to you or invoices you need to pay yourself. If you know that in 6 months’ time, you will be short, you can plan now how you will get over that hump as effectively as possible, with plenty of warning and no nasty surprises.
Do you have enough finance in place?
Do you sell a product or service to other businesses? Sometimes ensuring you have a healthy cash flow can be difficult.
You could potentially use Invoice Discounting. Most banks now offer this product. It effectively allows you to obtain finance for invoices you issue today instead of waiting 45 days for payment. Once you raise the invoice you are be able to obtain finance for a percentage of the overall invoice (maybe 60% to 80%). When the customer pays in 45 days the bank get their money back and you get the excess. This is a particularly good product where you have a strong customer base (albeit wanting to avail of 45 days credit) and you are growing so need to constantly reinvest in stock and materials.
Do You Have A Hold Of Your Credit Control?
When you invoice someone, at say the standard 30 days for payment, you are essentially lending them money at 0% interest for those 30 days (or longer!). You still need to pay your employees, rent, mortgage, bills – so where does this leave you? If your customer doesn’t pay within the allotted time, you can’t just tell your employees they’ll be paid in the next 7 – 21 working days.
Ensuring you have a clear, concise and understandable policy in place for your customers is paramount to ensuring healthy cash flow for your business and the overall success of it. Make sure your clients know that you mean business. If they know that they won’t hear from you the moment the payment is overdue, then you will definitely be at the bottom of their pile of invoices due to their vendors.
Have a credit control process in place and stock to it for all customers. Credit control is not just for bad debts, it ensures that you minimise your bad debts.
How Easy Is It For Your Customers To Pay You?
Customers want to pay you in the quickest and most painless way possible. This doesn’t include standing in long queues at the bank or waiting a week to receive an invoice in the post.
Have as many ways as possible for your customer to pay you, make it as easy as possible for them, so there’s no excuses.
Sending invoices electronically is the faster and most efficient way of invoicing a client. Via email or self-service invoice is the best way. Maybe set up a portal on your website that clients can access and pay their invoices straight away.
Say Goodbye To Time Wasters
Avoid open ended agreements with clients. It may seem like the best business decision at the time, but if that client ends up being a slow payer who’s majorly affecting your cash flow, you need to be able to cease trading with them and cancel the contract, at no penalty to yourself.
This is not only beneficial to your business but it sends out a message about your business acumen and no-nonsense attitude. People like working with companies that mean business.
What’s Your Breakeven Point?
Create a realistic budget and stick to it. Events will come up over the year where you may have to make unexpected purchases or opportunities may arise where you will impulse spend. By calculating your budget well in advance, you can calculate your break even point. As every unexpected or unbudgeted for expense arises, go back to the books and recalculate your breakeven point and how much of a delay it may put on achieving it.
Cash flow can be one of the biggest barriers for a SME to succeed. Check out our other blog post on how to successfully get your financial projections and cash flow right for 2018 here. If you’d like any more information, or would like to see how we can help contact us.