Managing business cashflow is a key aspect of ensuring that you have enough money to pay staff and suppliers, in addition to building up cash reserves to invest in the growth of your business.
Cashflow forecasting also allows management boards to identify and action issues on the horizon so that they do not pose a threat to an entity’s existence. Despite recent high profile cases in the press, it would be naïve to think that detailed forecasting is something only large companies can execute, or have the correct expertise to consider. There are many products on the market that integrate with accounting software to provide a semi-automated forecasting solution, and this is something that a business of any size should investigate.
But is recording and forecasting your cashflow enough? You may have weekly meetings to discuss the forecasts, and understand where the pinch points are, but how do you actually go about improving the position? Here are five main areas you should look at in the first instance.
Agree price and service level up front
The best way to ensure that you are paid on time is to close the expectation gap between yourselves and your customer. If you agree on the goods or service and the value up front, then there is less chance of a disgruntled customer through price, and more chance of getting paid within terms. This will also allow the customer to ensure that the correct amount is placed on their internal purchase order, so when the invoice comes through it will be matched and approved “seamlessly”.
Make it easy to get paid
Ensure that your invoices are sent promptly, and directly to the person or department responsible for approving/paying you. Often, the first time you will know that a customer is not going to keep to terms is when the due date passes, which elongates the payment process further. Some businesses make use of an Electronic Data Interchange (EDI), which not only saves money in operational efficiency, but also enhances the quality of data and improves cash turnaround time. Worth asking the question of your customers?
Explore the potential for on account payments
If a contract spans a number of months, then on account payments are essential. However, many businesses wait until the contract or service is complete before invoicing, and this puts a large amount of strain on cashflow as payments for consumables and staff will have already been paid out. It is not unreasonable to negotiate stage payments, and indeed if it is service provided on a recurring basis, why not consider monthly payments?
Make use of supplier payment terms… but don’t be late
In some cases it can be tempting to pay suppliers early, whether that be to gain an early payment discount or just so that it is one less item on the “to do list” to worry about. However, it may transpire that the small discount you receive stops you investing in a higher yielding activity, or hinders you when making a payment to other suppliers resulting in a late payment. Furthermore, as we are able to rely on the processes accounting products utilise to automate management and payment of supplier invoices, it does not make sense to pay an invoice early to get it off of the to do list. Supplier terms are an agreed length of time of further financing for your business – just do not be late!
Avoid unnecessary spending
My final point is one which could invariably be seen as the most obvious, and in some cases it is. Unnecessary spending on office consumables, travel and subsistence and other sundry expenses can be avoided by utilising modern working practices. Consider cutting down on paper (see EDI links above for sending invoices/orders), embracing video conferencing for meetings with customers and suppliers, and generally being less wasteful with consumables.
However, in a distribution or manufacturing business one of the most unmonitored costs is the cost to carry inventory. The main area to look at here is to ensure that your ERP software can link your customer and supplier demand to enable purchases of inventory at the right time. Investment in this area, as well as the expertise of a good analyst can really improve not only your cashflow, but also profitability of the business.
It is very easy to get so involved with the day to day running of your business, that you don’t make the time to look at the bigger picture and the positive impact relatively small changes can have. Improving your cash flow management is just one aspect of running your business that can lead to significant benefits and greater peace of mind. Don’t keep putting this task off, review today the difference it could make for your business.
If you would like further information on cash flow planning, Jake Standing can be contacted here.