Manage your money
An important subject
Cashflow management can be a problem for many small and growing businesses. According to research in August 2017 by Business Insider UK, 82% of businesses fail due to cashflow problems. Cashflow can be the difference between survival and failure, our seven steps can help you manage your cashflow.
7 steps to better cashflow management
Manage late payments
Late payments are a tough problem for small firms to deal with - small companies were owed £586bn as of October 2016, according to Lloyds Bank. Yet many companies won’t chase bad debts because they fear it will have a negative impact on customer relationships. A recent YouGov poll found the majority of small businesses don’t chase unpaid invoices until at least two weeks after they’re due, with 4% waiting more than two months.
There are practical steps you can take to stay in control:
- Ensure your payment terms are clear - ambiguous payment terms are likely to lead to delays
- Emphasise, politely but firmly, legal requirements to meet terms.
According to the Federation of Small Businesses (FSB) only 20% of members believe that the voluntary Prompt Payment Code, (30-day standard, with a 60-day maximum limit) is sufficient.
Check for creditworthiness
It is also important to check customers are creditworthy. If you accept large orders from individual clients, take steps to reassure yourself that they will pay. And refuse so-called “back-to-back” payments. This is where you get paid when the customer gets paid. It can cause your business problems further down the line.
If cashflow is an issue for you, our top tip could be an effective strategy.
Top tipIt’s worth considering placing incentives on swift payments. Even a small discount of 0.5% on large orders might encourage prompt payment.
For a small or growing company, managing cashflow can be something that gets overlooked. The focus in any business is always going to be on finding and retaining customers, providing good service, and developing new products. Yet, companies are more likely to go out of business simply because they run out of cash, than for other reasons.
Cashflow forecasts can be an invaluable asset to stop you getting into trouble. Done properly they will alert you to do something if trouble is on the horizon. “Planning gives you the opportunity to ask your business the right questions to avoid unnecessary costs, and to charge the right price,” says Michael Ogilvie, client services director at chartered accountancy practice OBC.
If you deliver in a timely way and appear professional and organised, you’re more likely to be paid in full and on time. Don’t give your customers an excuse not to pay, give your business a head start by sending invoices promptly. Late invoicing suggests to the supplier that you won’t mind late payment.
Did you knowWe have partnered with FreeAgent to give our customers online accounting software. FreeAgent can help with creating and sending invoices and much more, all under one roof.
Efficiency is key
It's important to manage stock and inventory effectively. Don’t overstock because it eats up cash, but equally try not to run out of stock either. If you have large capital payments to make, or if your day-to-day costs are expensive especially when you’re starting the business, try to finance the company without putting pressure on cashflow.
Ask whether you can you lease equipment rather than buy it. Especially at the start, capital costs can sink a company. It may cost more in the long term to lease, but protecting your cashflow early on makes this a good investment.
Free up cash reserves
As well as standard loans, there are other options that might suit your business. Asset finance spreads the cost of capital investments, while invoice finance helps release cash from unpaid invoices. If your business is suffering from lots of late payments, invoice finance could speed the process of getting cash to your account. Trade finance can be used when you need to make capital purchases, but the seller won’t offer terms.
However you finance your business, it is important to have back-up plans in place. Small businesses rely on cash liquidity, and an unexpected payment can quickly drain your business of resources. Once you’ve built up a cash reserve, keep a proportion of it in an emergency fund.
Have a contingency plan
Don’t invest everything you have in the business, and consider spreading payments. It's a good idea to know where you can turn quickly for fast cash, should you need it. Ensure you have an overdraft in place for emergencies - you don’t have to use it, but having one will afford you peace of mind.
Do all you can to avoid getting caught out by wider issues that you can’t control. The introduction of the National Living Wage, for example, impacted many small businesses’ cashflows in 2016. You must also make sure you understand the potential impact of new immigration laws.
Finally, if you are in need of help, don’t be afraid to ask for it. Small business owners who seek advice are more likely to succeed. There are always solutions to cashflow problems, don’t feel it’s a weight you have to bear alone.
Did you knowYou can use the FreeAgent cashflow forecast template to help with your planning.
A free Financial Health Check? Yes please.
Book a free Financial Health Check with one of our Relationship Managements today and we can help uncover key areas or focus for you and your business.
Accounting software just for you, tempted?
Royal Bank of Scotland have partnered with FreeAgent, an online cloud accounting software created with the aim of helping small businesses manage their finances through one easy to use platform. FreeAgent is packed with benefits, learn more about how it could benefit your business.