Some of the best businesses are brought to their knees by cash flow issues.

Businesses which were full of promise with committed and passionate owners backed up by motivated staff disappear from Companies House on a daily basis because they didn’t have enough ready cash (or access to debt capital) to meet the bills.

Late payment is definitely an issue but, as business owners, we’ve got to take some of the responsibility ourselves. If you know this is a problem in your particular sector, it’s time to take action.

Here are Easy Peasy’s four ways to make sure you don’t run out of cash, no matter how much you’re selling and no matter how delighted your customers are with you.

Invoice and chase

Always get your invoice to the customer as quickly as you can. Let it show on your invoice what your payment terms are.

Try to negotiate terms that are as favourable to you as possible. Just because everyone else might be doing 30-day invoices, it doesn’t stop you for asking for 14 days. Some will object, others won’t. But you’ll never find out until you ask the question.

What is your trigger point for invoicing – as soon as the order is placed, as soon as the order is completed, or are there multiple milestone points at which invoices become issuable?

Whenever it is, make sure you do send the invoice as early as you can. If you’re a client of ours, the chances are that you use the Xero online accounting and bookkeeping system. Using Xero, you can draw up and dispatch an invoice in less than a minute using your desktop PC, laptop, tablet or mobile.

What if you don’t feel comfortable chasing up the invoices you’ve issued? You’re not alone – there are millions of business owners in Britain who feel just like you.

We offer a credit control service where we’ll chase your invoices for payment up for you. That includes pre-due date chasing, dunning letters, and more. We’re experts at this and always keep your customer on side.

Offer as many ways to pay as possible

Cheques are great in many ways but they are a hassle. They take days to arrive in the post, you’ve got to take them to your bank, and then wait for it to clear. And, as we all know, cheques have the propensity to bounce on occasions.

For customers who are insistent on continuing to pay by cheque, just let them. It’s not worth getting into an argument over, particularly if you like and trust them and you need their business.

You can encourage other customers to pay by direct bank transfer. Other options to consider include allowing clients to pay by credit or debit card and by direct debit. If you’re a Xero user, you can set up your business up to receive these forms of payment on your account.

Direct debit is a convenient solution for companies you regularly bill. Agree a date with your client on which payment is taken and make sure that you account for every single product or service provided on your bill and on your direct debit money transfer request.

Resistance to paying by credit and debit card is much lower than it used to be a few years ago. The fees associated with using them are coming down all the time and, particularly in the case of credit cards, the handling fee you pay may be less than handling fees on cash or cheque deposits.

If you’re in an industry where the payment lead time is abnormally long (60 days, 90 days, 120 days for example), you may wish to consider invoice factoring. With invoice factoring, you are paid up to 90% on the production of the invoice to your customer nearly straight away with the remainder coming when your customer has settled up with the factorer (minus their fee).

Two things to remember about invoice factoring are that you’ll only be paid on completed work so, in most cases, factorers won’t be able to work with milestone-based payment jobs (with the exception of construction) and that each of your customers will be assigned a credit limit which may be less than you like.

Forecast your cash in…

There are generally two types of incoming cash flow – smooth and lumpy.

Smooth cash flow is where you receive payments into your account every day or nearly every other day. Lumpy cash flow is where you can go for days or weeks without cash incoming.

Smooth cash flow businesses tend to be characterised by simpler products and services with lower average order values. Lumpy cash flow companies more often than not provide complex, multi-faceted products and services with very high order values

If your business is smooth, take your company’s last 60 days’ bank accounts, add up the amount of cash you’ve brought in and divide that by 60. You can then use that figure as a good estimate to understand what speed your business is going at and how much cash you’ll bring in during the following month or quarter.

If it’s lumpy, make a note of all the payments you expect to receive in for the next month and quarter. Look at the due dates, look at each customer’s history and record on late payment, and try to forecast exactly how much you’re getting in and when.

…and balance it against your cash out

There are certain bills you can always expect. You have to pay them at the same intervals. Using your knowledge of the cash you’ve got coming in, you can ascertain whether you’re going to be able to meet them or whether you’re going to have to cut back on other expenditure if sales don’t pick up.

Watch out for these pressure points –

  • 1st day of the month – business rates and commercial mortgage (if you own your premises)
  • 7th of the month once a quarter – VAT day
  • 22nd of the month – PAYE reconciliation
  • 25th of the month once a quarter – rent day (if you’re in leasehold premises)
  • Last Friday of the month – staff and director pay (minus income tax and both NICs)

Cash flow is something you always need to keep your eye on. If you’d like to discuss how to get pay in faster, how to allocate surplus cash, or how to save in lean times, please call us today 01909 261985 or email info@easypeasyaccounting.co.uk