6 Ways to Manage Cash in a High Interest Rate Environment

After decades of favourable interest rates and more available credit, recent rising interest rates have posed a significant challenge for business proprietors. Increases in borrowing costs, combined with rising costs and commercial volatility mean that even profitable enterprises are grappling with cash crunches.

Short-term financing routes have turned costlier, marking a shift from the era of easy money. This underscores the need for a robust strategy to manage available cash and avoid shortfalls. While strategies for managing cash flow can quickly turn towards amplifying sales or business expansion, many business owners miss the vital role of basic cash management and process controls within the business.

Here, Haines Watts High Wycombe Director Gary Heywood explains the core pillars of day to day cash management in a high interest rate environment to maintain liquidity and control.

1.    Prioritise Completed Work

For businesses offering billed services, turning over work and moving on to the next project becomes second nature. However, in the rush to take on new projects, it can be shockingly easy to miss closing existing tasks properly. These delays in invoicing or protracted job completions can be detrimental to your cash flow, with a raft of nearly-done work that can’t be billed dragging you cash flow down.

• Earlier is better: Make it a standard practice to issue invoices immediately upon job completion; avoid the tradition of waiting until the month's end, especially for fixed-fee projects where all the work has been delivered.
• Source partial payment where possible: Should a job drag on, whether due to project delays or cash flow issues on the client side, create an arrangement for staged payments in order to recoup some capital.
• Create clarity: Document clear terms for job completions and ensure your clientele are in sync and amenable to these terms before starting any project to avoid surprises.

2.    Manage Payment Terms

While  30-day payment terms are the go-to for many businesses, different economic scenarios may demand a more agile approach. This can be especially important when larger corporations stretch it to 60-90 days, impacting your cash flow adversely.

• Diversify your reliance on clients: Aim for a balanced client portfolio with varied payment terms to avoid being over indexed on any particular client where delays or longer terms can leave you out of pocket.
• Document your terms: Incorporate Service Level Agreement (SLA) terms during price and payment negotiations to create a clear understanding with clients on when you expect to be paid and to provide clear recourse in the event of delays.
• Incentivise good behaviour: Encourage quicker payments by offering early payment discounts for clients where you predict potential issues.
• Build good habits: With new clients, setting stringent payment terms from the outset sets a precedent and ensures compliance.
  
  

3.    Debtor Management

For any business invoicing clients, it’s a fact of life that some of them will fail to pay on time. That’s why efficient debtor management is as critical for cash flow management as the act of invoicing itself. Debtors and delayed payments are guaranteed to rise during periods of economic stress – in these scenarios it will usually be the case that working with debtors leads to better outcomes than taking an adversarial approach.

• Create a system: Establish a stringent procedure for noticing, tracking and chasing overdue payments; some delays may be accidental or unavoidable, but by quantifying outstanding cash owed you can plan for more effective reimbursement. This can include automated flagging systems to pinpoint overdue invoices, enabling automatic resending or escalation.
• Check the details: Validate that invoices are dispatched to the correct personnel to fix any discrepancies quickly. If in doubt, escalate invoices to a higher authority at your client.
• Track and manage actively: Keep a meticulous list of outstanding invoices, regularly reviewing and actioning overdue items, applying gentle pressure and being flexible where needed to sort any issues.
  
  

4.    Manage the timing of payments

Cash flow is often a matter of aligning the schedules of money in and money out of your business. Synchronising your payment rhythms, particularly concerning wages and quarterly VAT, can ensure that your business is properly capitalised and avoid falling into overdrafts or needing expensive third-party capital  to cover a shortfall.

• Keep an eye on the upcoming month's fixed costs and evaluate your cash stance to meet these obligations.
• Implement regular and management accounts to track your financial position, ensuring a tight alignment between your inflows and outflows.
• If cash flow appears squeezed, immediately review outstanding debtors to reinforce your position.
  
  

5.    Making the Most of Cash on-hand

In a time of high-interest rates, making the most of excess cash or securing favourable loan terms can make a substantial difference to your flexibility and growth.

• Don’t let cash sit idle: Regularly review your cash reserves and contemplate locking in a portion into savings to capitalise on the rising interest rates.
• Watch your debts: Assess the cost of loans and overdrafts; negotiate for better terms where feasible to ensure you’re always getting the best deal.

6.    Cost Reviews

Periodic cost reviews can unearth saving opportunities and spotlight underperforming business areas.

• Keep communication open: Engage in dialogues with suppliers and creditors to negotiate extended payment terms where necessary, preserving your cash reserves. Likewise, maintain transparency with stakeholders about your financial reality.
• Work with your partners: Contemplate reviewing VAT schedules with HMRC to explore avenues for easing cash flow pressures.

Stay in control of your cash with Haines Watts

Cash is the lifeblood of your business, even more so in times when credit and flexibility are in short supply. At Haines Watts, we work with businesses of every size, from startups to multinational corporations to build systems and processes that give owner-managers the control and visibility they need to manage their capital more effectively.

From forecasting to accounts payable, we ensure you always have the information you need to make the right decisions for your future. To find out more, get in touch with one of our advisors today.