The road to recovery is paved with cash

The road to recovery is now on the map. We’re about to join the rapid growth highway. But businesses need to take care that they don’t get de-railed into a cashflow pothole.

Mark Newbold shares his hard-earned but simple hacks on how to preserve cash in your business and avoid billing traps as you gear up operations.

The cash crash

Suppliers want to be paid within seven days but customers want to pay in 60 days. So there’s your cash flow gap right there. As the market accelerates and you try to meet the new demand, the problem is exacerbated. You want to take on that huge new order. But can you afford to? There are simple things you can do – and avoid – to keep your cash flow on track.

Produce a cash flow forecast

Whether you have £5m or £50m turnover, you will need a realistic cash flow forecast. It doesn’t have to be rocket science. Just step back and think through what is likely to happen over the next few months. At the simplest level you need to map out your fixed costs - rent, rates and salaries. Things you have no choice but to pay on dates which are set in stone.

Some companies go further and analyse what cash they have in different bank accounts. They consider different types of expenditure in detail. Then there is the income side of things – trickier to predict but often helped by breaking things down into major contracts or largest clients and estimating the smaller jobs.

Run credit checks

Before accepting orders – especially large ones – you must credit check the companies. There are quick and simple systems such as Dun & Bradstreet or Experian. Be wary of relying on the published payment days that listed companies must provide – it’s too easy to massage the figures to give a favourable impression.

Streamline your billing processes

The cornerstone of protecting the cashflow in your business is looking at your billing processes to check you’re setting yourself up for a smooth payment schedule.

Key actions you can take are:

• Bill fast – it’s tempting to stick with established processes such as the monthly invoicing cycle but the quicker you bill, the quicker you’ll get the cash

• Offer early payment incentives - It’s easy to incentivise customers to pay their bills quickly. Offer a 2% discount for prompt payment. It’s straightforward to produce bills with the cost if paid within the agreed terms (typically 30 or 60 days) and an alluring reduced figure if they pay quicker. Just make sure you know enough about your pricing and margins to win whichever route they choose.

• Use purchase order numbers - Another reason that there is a delay in receiving payment is the lack of a purchase order number. If you have Blue Chip clients – like banks or the major supermarkets – you’ll know this well. No PO, No payment.

• Tighten your credit control - Within a week of sending out an invoice, pick up the phone. Check they have received it. Check they are happy with it. That way you can set the clock (or tacograph) ticking for when you initiate the credit control calls.

BACS payments take up to three days. Most customers will have set days and dates when they do their payment runs so call a few days in advance and check that you’re scheduled for payment.

Use invoice discounting

I know businesses may be nervous about invoice discounting. You may wrongly assume it means that a third party is getting on the phone and destroying valuable and sometimes delicate customer relationships. But I am a big fan.

It can be expensive. And there are set up costs. But it can really take the pressure off business owners. It’s confidential and off-balance sheet so no one will know that you are effectively selling your invoices to get money into the business fast. You do, of course, need to do the maths. Know by how much you need to increase your prices in order to preserve margins.

Negotiate with your suppliers

Your customers will be pressing you to extend payment terms. So pick up the phone and see if you can do the same with your suppliers. Some may be resistant. But others may be happy to agree to your proposals.

The key thing is to do what you say you’ll do. As you build trust amongst your creditors they will be more willing to allow further flexibility.

Vary the date for payment

Most payments fall due at the end of the month. So consider asking suppliers if you can make mid-month payments to even out the demand for cash. You might combine this request with one to break large payments down into a series of regular instalments.

Be wary of international penalties

The UK lags behind many European countries with regards to paying on time. There are no laws or penalties for UK companies that don’t pay within the agreed terms. But on the Continent it’s different story. For example, in France, a payment that is a month late receives a 40 Euro fine and 10% interest.

Prepare your bank

Even if you don’t plan to use it, it’s good practice to establish lines of credit in advance. Part of your risk management process might be to ensure that there are facilities ready to use should the need arise. A continuing dialogue with your bank, and prudent preparations, will put you in good stead should you suddenly find a hole in your working capital.

Understand your business cycle

By paying careful attention to the ebbs and flows of cash into your business, you start to learn how your business cycle works. The quarters where you are awash with cash and those where there is a nerve-wracking dearth. You can almost see the waves. And with greater clarity of the cycle you are better able to plan for and absorb the shock.

How can Haines Watts help?

We help your business prepare for and navigate the ups and downs of cashflow. providing pragmatic, hands-on support in tackling operational processes and systems.

If you’d like to discuss how to better manage your cashflow, get in touch.