If you’re a business owner or somebody with even a passing interest in the mechanics of running a successful company, the saying ‘turnover is vanity, profit is sanity, but cash is reality’ may sound familiar.
Our experience of working with over 1,600 SMEs has taught us that, more than a title of a presentation or an opening gambit of a guide, this mantra serves as an important sanity check and a reminder for all business owners.
With that in mind we’ve put together this guide to share practical tips on the steps you can take to improve your cashflow and the working capital position of your business.
In simple terms cashflow can be defined as the amount of cash (and cash equivalents) flowing in and out of a business.
As such, cashflow can be either positive or negative. Positive if there is more money coming into the business than going out, and negative if the opposite is true.
To survive and ultimately thrive, it’s important that a business maintains a positive cashflow. The more money in the business, the better your cashflow position.
By ensuring your business has a positive cashflow you’ll be able to avoid taking on debt and be better placed to deal with unforeseen events in the future.
Beyond this, a positive cashflow means you’ll be able to pay suppliers on time (maintain good working relationships), ensure there’s enough money for wages (keep employee morale high), and invest in growing your business (plan for a successful future).
In contrast, a negative cashflow can significantly damage your business in the short, medium, and long-term. There will be less capital to invest in the right team, equipment, or strategy and a feeling that you’re constantly chasing your tail just to stand still.
Signing up a new retainer client or winning a large project can feel like a big win for your business. However, it will only be a success if the new customer pays the money owed for the goods or services you have provided.
With that in mind, it’s a good idea to credit check potential customers before signing on the dotted line and agreeing to work with them.
But where to start?
The first thing you can check is their Companies House listing. Anybody can access the history of all registered UK companies here, seeing when the company was formed, a history of directors, and whether they file their returns on time. This will give you an early indication of their creditworthiness.
Beyond desk research, you could pay a specialist to complete a professional credit check. Businesses like CreditSafe offer this service and the peace of mind that comes with it for a reasonable fee. itsettled offers free credit checks and reports to all its customers, which is another benefit of using our credit management software.
You can also see if the business you’re considering working with has signed up for the Prompt Payment Code. As the name suggests, the aim of this initiative is to promote a prompt payment culture with signatories committing to pay 95% of invoices within 60 days and work towards 30 days as normal practice.
It sounds obvious but many of the businesses we speak with don’t have a set process for promptly sending out invoices. Rightly or wrongly, late invoices send a signal to your clients that you’re casual about being paid.
If a customer has multiple creditors to pay then you can bet your bottom dollar that the invoice coming in late will be going to the back of the queue.
Once you’ve provided goods or services for a customer, send them an invoice immediately.
If you’re looking to improve your working capital position and cashflow by getting your invoices sent out (and presumably paid) in a timely manner, then you need to make sure that you are invoicing accurately.
Accountancy software solution providers like Sage or Xero can help with this, as can easy-to-use invoicing platforms like Wave.
To stand the best chance of getting paid on time, you need to ensure that you don’t give your customers any excuses for not paying their invoices.
A questionable item, inaccurate date, or total amount that doesn’t match the quote originally shared will all be (rightly) flagged by customers.
The ensuing debate, back and forth of emails, and time to resolve will delay the customer paying what you’re owed and ultimately have a negative impact on your business and your cashflow.
If you’re sending your invoices out promptly and ensuring they’re accurate, you're golden right?
Sometimes…
It all depends on the customer you’re working with. In the UK some 47% of invoices are paid late. With the figure that high, it’s important that you have a plan in place for when you’re inevitably paid late.
To help speed the process along it’s best to send the invoice to the person who is going to be paying the bill and provide clear instructions of how you’d like to be paid along with your bank details.
It’s important to try and understand as best as possible what happens to your invoice once it lands in your customer’s inbox.
Does it immediately go to the person who is going to pay the bill, or does it go to somebody else who will process the payment? Do multiple people have to sign-off an invoice before it is paid? Does your customer only process payments on specific days of the month?
It may take a couple of weeks and a number of conversations to start understanding how your customer’s payment process works.
However, the process can be hugely valuable when it comes to gaining insight into the date you can realistically expect to get paid on for the work you complete.
Upselling to your existing customers can be a great way of improving cashflow and your working capital position. After all, you've already invested in acquiring said customer and building a working relationship with them. It therefore makes a lot of sense to sell additional products or services to these customers, rather than investing additional time and money on acquiring new customers.
What is the makeup of your customer portfolio? Do you have one or two large clients who contribute over 60% of your income who know this, and therefore demand longer payment terms and discounts?
If this sounds familiar then it might be a good idea to reconsider the type of customers you’re looking to work with.
Looking at your best paying customers can be a good place to start. If all of your customers are late payers then take the time to develop a persona of who your ideal customer is.
What industry do they operate in? What’s the size of the organisation? What’s their average order size? What payment terms are likely to work for them? With all this information in hand you’re better placed to understand who your ideal customer is, and you can then start developing a plan to attract them.
It can be difficult to escape the day-to-day stresses and responsibilities of running a business, but carving out time for medium and long-term planning is crucial.
Reviewing historical financial performance by month, quarter, and year can provide great insights into how future events and trends may impact your business.
By understanding and factoring these into your planning you’ll be able to better mitigate against future risks and challenges.
Cashflow forecasting is a hugely beneficial exercise as it allows business owners to analyse and review two important financial metrics - profit and cashflow.
Having up-to-date information on how much capital is available at any given time can help shape your future strategy and plans.
Investing in upskilling your existing workforce, technology, or new equipment is a surefire way to improve your cashflow.
Although it will have a negative impact on your working capital in the short term, done correctly, investment can have a huge positive impact on your business over the medium and long-term.
Here at itsettled our cashflow management and debt recovery software automatically collects your overdue invoices and boosts your cashflow.
This saves you and your team time, improves your cashflow position, and allows your business to thrive.
Check out our ‘how it works’ page to find out more and sign up for your free trial today.
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