Managing Your Cashflow
Updated: Jan 14
For many of our clients, who are technology start-ups, specialist manufacturers or SME’s, cash is a major concern. And it’s not just our clients, in a recent discussion we could only recall two companies that had not closed because of cash shortages (The News of the World and Anderson Consulting where reputational damage led to their closures).
Here at Practical CFO, we’ve put our heads together and complied the following Practical ways to manage your cashflow;
Forecast your cash in and out flows daily for a minimum of the next 30 days (90 days is even better). If you can produce a best, better and worst-case scenario. The more you know about the payments you have to make, and the cash you may or not may not receive, the more warning you will have of cash flow tight spots. Don’t forget to add the statutory payments such as PAYE and VAT. Knowing your future cash position will allow you to take early corrective action. There is nothing worse than knowing that there is no money in the bank to pay the wages when it is too late to do anything about it.
Also ensure you know who and where future invoices should be sent, with the correct details included such as purchase order numbers. Some companies make an art form of not paying an invoice because it doesn’t have all the details they require, so it is essential to address these requirements when preparing the contract.
Better by design
Think about the timing or when you pay your costs compared to when you get paid;
Add an up-front deposit and staged payments to your contract’s terms. An installer client of ours realised that they paid for all materials and subcontract labour before they even invoiced their client let alone get paid! We helped change some of those contracts but also improved processes so that the client could borrow against part completed work.
SAAS doesn’t haven’t to equal monthly payments from your clients. Often clients are so large that it simply doesn’t matter to them whether they pay a year in advance.
Prioritise where you spend your cash as you grow. We worked with a manufacturer recently who would happily build a stock batch that could last a year, but not have any cash to build another stock line…simply dealing with batch sizes improved sales cover, revenue and cash flow.
Consider paying all your staff monthly: We know this will be industry specific and may not possible in an existing business, but it should be considered if you’re starting out. This can remove the stress of needing to manage your wage bill on a weekly basis.
Pay your suppliers once a month (particularly overheads), and only pay those that are due or overdue. It won’t hurt your relationship if your supplier knows that you always do a payment run on the last day of the month. They’ll be able manage their cashflow, and you’ll have a chance to get cash from your customers before paying your suppliers. Beware the contractor who expects to be paid when they submit an invoice!
Minimise the number of suppliers you pay by direct debit. Admittedly there is nothing you can do about the credit card repayments or bank charges (and they always make sure they get paid) but do you really need to have a direct debit for your business rates or utility bills? Give yourself as much flexibility as possible when it comes to making payments.
Pay for large capital items via a lease or a loan. Using debt means you can spread the cash impact over months or years. Keep an eye on interest rates and shop around for the best deals, and beware of the tanned photocopier salesman bearing paper gifts…
People pay invoices
Invoice promptly: Send yours by email as soon as possible after the service or goods have been provided. There is research that suggests the quicker you invoice, the more likely you are to be paid quickly. Always take advantage of the goodwill people feel towards you when they’ve received great service.
Chase your overdue invoices promptly and get closer to the purchase ledger staff in your customer’s business. The more they know and like you, the more likely they are to put your invoice in the next payment run and even add you to the list when their own cash flow is tight. Build a relationship and if you need to, keep notes about their children, pets, football club or past times. Asking about Tiddle’s last visit to the vet will – literally – pay you dividends.
As your business grows you can access other sources of cash, such as invoice factoring, bank loans, or external investors. If you would like help managing your cash or other aspects of financial management then contact us on firstname.lastname@example.org