Cashflow is key to the success of any business so it is absolutely vital that small business owners develop good cash management practices. In part one of a series sponsored by Visa, Lucie Mitchell speaks to experts and shares seven top tips.
1. Prepare and update cashflow forecasts regularly
It is really important to know exactly what money is coming in and going out at all times, and this can be done through cashflow forecasts. You must always ensure details of transactions are recorded accurately and regularly. Include payments, receipts and opening and closing bank balances in your forecast.
"Cashflow forecasts should be a key tool in the management toolkit. They can highlight when the business might run low on cash and can be the basis for an action plan to remedy the situation before it happens," says Clive Lewis, head of enterprise at the ICAEW.
2. Stay on top of invoicing
Make sure you set up an effective system for invoicing and issue an invoice as soon as the work is completed.
"Whether you invoice before or after you do the work, or some upfront and some on completion, it’s crucial to invoice your customer promptly," says Emily Coltman, chief accountant for FreeAgent. "A sale is not final until the money comes in, and customers can’t pay you if they don’t have an invoice to pay.
Darren Fell, managing director of Crunch Accounting, adds: "Invoicing is a crucial aspect of small business survival, and plays a key part in maintaining a healthy cashflow position. Invoicing a client straight away is a smart approach to take, as this should ensure swifter payment, keeping your balance sheets in a pleasant state."
3. Chase overdue payments
It is crucial to stay on top of any late payments if you want to maintain a good, steady cashflow.
"Don't let customers keep you waiting for payment," remarks Coltman. "Remember, it’s you, not they, who set your payment terms. Make yours clear on your website and on your invoices, and keep to them. Use automatic credit control tools to chase any customers who haven’t paid."
4. Ask for payments upfront
This is especially true for big, financially-lucrative projects, says Fell.
"Demanding payment up-front is an option, meaning that cashflow should be looking healthy from the outset," he adds. "Another option is to insist on staggered payments throughout the project, potentially offsetting any cashflow issues that may arise from unexpected financial outlays."
Chris Checkley, a partner at Russell New, says that getting customers to pay in advance is an effective and simple way to boost cashflow. "True, that is perhaps asking a lot and wishful thinking for some firms but it can become a reality for others if they approach the challenge in a creative way."
5. Cut out non-value add activity
Seek out parts of the business that are costing money but not adding any value – and cut them out. Tracey Bovingdon, founder of high street tea chain Tea Monkey, advises that if it doesn’t add value to your customer, brand or bottom line, then don’t do it.
Kelly Clifford, author of Profit Rocket, adds: "Look at other areas where operational expenses may be cut without permanently disabling your business, such as payroll or goods/services with small profit margins. Every business struggling for survival is losing money in some of its components."
Cost-reduction programmes should be a topic that remains at the top of the boardroom agenda, comments Checkley. "These should be kept sustainable and not just a fluffy internal PR ploy," he adds.
If times are really tough, it may be worth considering trimming down your workforce. Posting in BusinessZone.co.uk’s sister community, UK Business Forums member 'CSS1' advises: "If work starts to dry up or slow down, either lay people off or force them to take leave."
6. Pay your bills at the latest opportunity your suppliers will allow
Instead of paying your suppliers straight away, wait until the payment due date. Timing these payments right can help keep the cash flowing through your business. However, do remember to keep to the payment terms, otherwise relationships can be damaged, says Coltman.
"If you pay them before the bill is due, then your suppliers will be very happy indeed – but you could risk running out of cash for another bill, or a tax payment," she warns.
Paying suppliers with a credit card can be another way to benefit your business. Using this method will allow you to better manage your cashflow as you can delay when the money for bills leaves your company. It is possible to get up to 56 days interest free credit.
7. Consider offers and discounts
One way of giving your business a cash boost is to introduce special offers, either when starting up a company or during tighter times.
"One potential option is to offer discounts for prompt payment - thus settling invoices at the same time as drawing in business," advises Fell. "Whilst of course there are the traditional options of BOGOF and percentage discounts. If used effectively they can prove a useful asset to gather funds, whilst potentially developing brand loyalty."
Also in the series: