Cash flow management tips for small businesses

Cash flow management tips for small businesses

'How can I improve my business's cash flow?'

It may be an old worn out saying, but as every business owner knows, cash is king. Your business may be asset rich on paper and your accounts might even look healthy, but if you can’t pay your suppliers and your staff and all the other daily expenses you need for the business to move forward and to grow, then your business will not survive for long.

It is essential that every business has an effective system for managing their cashflow and credit control, so that they don’t get into difficulties with the day to day running of the business. 

Effective cash flow management can also allow you to build up a cash reserve, so that you the business is not trading hand to mouth and can take advantage of beneficial opportunities as they arise, which may not be available if you don’t have the reserves to fund them.

In this article, Senior Insolvency Solicitor Eleanor Stephens provides some practical advice for small businesses looking to improve their businesses cash flow.

What is an effective cash flow system?

In simple terms, an effective cash flow system involves good invoice management, good record keeping, and good credit control.

Managing invoices:

Effective and early management of your invoicing is key. The longer work remains un-invoiced, the less likely it is to be collected in full. It is important to seize the moment to be paid when the client is in need of your service, not wait until they have received the service and are no longer engaged with you. 

  • To do this, you should ensure you set up an invoicing system which invoices immediately upon completion of a sale or service, if not before.
  • Depending on your business, if you are providing a service where invoicing on completion may mean an invoice does not go out for more than a few weeks, and possibly months, then agree with your customers or clients clearly in advance of providing a service, that you will require money on account, and/or if the service takes more than (for example) 4 weeks to complete, that you will invoice every 4 weeks. Timing will depend on what is most appropriate for your business.  Agree in advance that any invoices unpaid for more than (for example) 7 days will result in a break in provision of services until payment is made.
  • In this way, as well as encouraging fast payment, you can get a heads up on any customers who are unlikely to pay you in full or on time after what might be months of working for them or supplying them.
  • The value of clear communication with your clients should not be overestimated in good credit management. Ensure that your customers or clients are fully aware in advance what is expected of them in terms of credit and payment. That way no misunderstandings will occur, and they won’t be surprised if you take enforcement action for non-payment, or if you put a pause on acting for them until payment is made. 
  • Ensure payment is easy for your customers, and methods of payment are very clearly set out with each chaser.

Credit control:

Even businesses that have a very effective invoicing system in place will experience late or non-payers at times. However, the better the invoicing system, the quicker it will be to recognise this and take early action.

  • Invest in either the time or the personnel to keep up to date with credit control on a regular basis. If your small business can’t afford to employ a credit controller, set aside time each week to keep on top of this yourself – at least a couple of hours. Neglecting this in order to carry out more work might seem important at the time, but if you are not being paid for that work, then there is little point in the effort expended.
  • Take action as soon as an invoice is unpaid. This should start with a clear request in writing for payment, giving a short time period in which to pay before further action will be taken.
  • Request payment politely and regularly. For example, chase every 7 days to begin with. The squeaky wheel gets the oil. If you are asking for payment continuously, you are more likely to be paid than someone who is not chasing that customer.
  • If invoices remain unpaid for a period unacceptable to you then consider enforcement action. Our team of business dispute solicitors can help you resolve a dispute with another business, if they refuse or ignore your communication over unpaid bills.

However, prevention is better than cure! If customers are encouraged to pay in advance or provide a deposit, or are regularly invoiced and chased, then 9 times out of 10 enforcement action can be avoided, which can be costly and time consuming in itself.

Record keeping:

It is impossible to have an effective invoice and credit control system in place if you don’t have up to date accurate financial records.

All business should be on top of their day to day cash position through accurate record keeping. It is essential to keep track of how much you have to pay by way of expenses and outgoings such as employees and suppliers on a daily basis, as well as to know what money is coming into the business on a regular basis.

Regularly review the books for late payers (weekly if not daily) so that these can be managed as soon as this becomes obvious, and remedial action can be taken rapidly.

Never mix your personal finances with the business finances. Apart from the fact this can lead to difficulties and have repercussions in the future if the company gets into difficulties. The picture must be clear for the business by itself, so that you can manage the cashflow.

With well managed accounts you will also be able to provide accurate cashflow forecasting, which is essential to be able to manage how the business is likely to perform in the mid to long term.

Managing stock and staff:

Keeping accurate up to date accounts will also allow you to forecast your future requirements for stock and staff, and this is particularly important for businesses that are seasonal and fluctuate. Buying too much stock will unnecessarily reduce cashflow when it might be better used elsewhere in the business for example. Equally, with good record keeping you can predict staff quotas required during the year.

Do I need to spend to ensure good systems are in place for my business?

There are many systems on the market for bookkeeping and credit control, and a business can bring in experts to help them, such as credit controllers, accountants and lawyers.

However, with a bit of careful planning and organisation any business can put in place the measures set out above to ensure cash flow is managed well for their business.  This requires some initial planning, and regular time spent each week to keep on top of it, but this can mean the difference between a business thriving or failing, so it is well worth taking the time up front to consider the options.

Other methods of managing cash:

If your business requires a very regular injection of cash, but your invoicing means that payment can be slow, then you might want to consider invoice discounting or factoring. This allows you to obtain cash in advance of payment of your invoices from a factoring company on a regular basis.

Beware though, this will incur a fee, and you will only be paid a percentage of the invoice (such as 70 or 80%), the factoring company will take the rest.  You will remain responsible for chasing the invoices and collection too. Factoring companies will inevitably require security from the business in case of unpaid invoices.

Bank loans are another well used way of managing cashflow. However, again, this will incur charges and banks are likely to require security from the business.  It is also essential that there is a plan in place to allow for repayment as well as to meet your usual business expenses.

How we can help

If you find yourself in a dispute with a customer or client over unpaid bills our Business Dispute solicitors can help. We can provide advice on the best options to recover your debt and can make a claim or mediate on your behalf.

If you find that you are experiencing cashflow difficulties and would like to know your options as a business owner, you can contact one of our Insolvency Solicitors to discuss the options available to you.

About our expert

Eleanor Stephens

Eleanor Stephens

Senior Recovery & Insolvency Solicitor
Eleanor Stephens is a senior insolvency solicitor with over 20 years' specialist knowledge in all aspects of insolvency, both corporate and personal, covering contentious and non-contentious matters.

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