02 Jan Cash flow
Cash flow: E for Enough or E for Empty?
Irregular cash flow is a problem for all businesses so it's important to learn ways of coping with the highs and lows caused by seasonal slumps and bad debts. Here are 6 top tips to help you adopt a more proactive approach to your cash flow:
1. Create a cash flow forecast and compare it to actual
A cash flow forecast is an estimate of the arrival of income balanced against the need to cover necessary expenses. If you check it regularly, and review progress against actual, a forecast can help you manage times of affluence as well as forewarn you before the gauge points to empty.
Say for example, you have a policy of allowing your customers 60 days credit but, on average, they actually take 90 to pay. You absolutely have to take this into account and adjust your forecast accordingly. This allows you to plan and prioritise your own payments – to staff, suppliers and the often-forgotten HMRC – before making significant purchases, like new equipment. The idea is to avoid spending on what you don’t need with what you haven’t got.
2. Have contingency plans
It’s very easy to spend money when you have it but, like the British weather, the conditions can change really quickly. It’s important, therefore, to cushion yourself against the unforeseen or unplanned. When you can, put aside 30% of your income for contingencies. If you know that you need to borrow funds to cover a cash shortfall, have the loan in place well before it’s needed. We often help our clients source affordable loans so they don’t pay over the odds on interest rates.
If you are in that happy position of having surplus cash, get professional advice on how to put it to good use. Interest rates may be poor for savers at the moment but a good financial adviser can advise you how to at least maintain the value of your hard earned cash. If you are a 40% tax payer, talk to us on how payments into a pension scheme can save you some money.
3. Invoice quickly and accurately
A lot of cashflow problems stem from not getting income due to you so be sure to get yourself organised in the first place:
- Invoice as soon as you can.
- Make sure your invoices reflect the goods and services you provided and the sum quoted.
4. Set your own Ts & Cs
Some customers never pay on time and, the bigger the company, the longer credit period they often demand. You must do everything in your power to get your invoices paid as soon as possible. Negotiate your own terms and conditions (including interest accruals) with each customer and make sure they don’t take advantage of you. Introduce yourself to the person responsible for actually paying your invoices so they know you’ll be on their case (courteously) if they miss the deadline. Or, consider factoring, especially if you have a high staff bill. Remember, customers go bust too so stay on the case and keep on asking for your money when it’s overdue. This is all part of good credit control – a topic we covered in an earlier blog.
5. Work with suppliers
If you do have a cash flow problem, talk to your creditors in good time and agree a plan. They’ll be much more understanding than if you just ignore their pleas for payment. Wouldn’t you?
6. Business basics
Over the years we’ve observed that going back to business basics can help avoid a negative impact on cash flow, particularly for start ups. For example:
- Be careful not to have money tied up in too much stock. It could be that a review of your processes might result in a leaner operation.
- Avoid overtrading– as in not having the funds to fulfill orders. This is all about scaling your business so it becomes high growth. (A topic for a future blog we think.)
Finally, check if you are eligible to get on HMRC’s VAT Cash Accounting System as this will allow you to delay payments without incurring fines.
As always, the answer’s in the detail. #LoveMyFinances because your numbers will help you stay on top of things. Rajani & Co is here to help, so don’t hesitate to contact us.