Cash Is King: 10 Top Tips For Managing Your Cashflow
Cash is king is a well-known saying in business but what exactly does it mean? Well, businesses go bust in the long term through lack of profit, but fail in the short term because they don’t have enough cash in the bank to pay their bills. Cash flow is the life blood of any business - more firms go under because of cash flow problems than anything else. The principles of good cash flow management are actually very straightforward. Here are my top ten tips for ensuring the cash flows in your business.
1. Prepare and Maintain A Cash-flow Forecast
Preparing and maintaining a cash-flow forecast to project your income and expenditure over the financial year will help you to gauge whether there is enough money coming in to your business to (a) pay your bills (b) invest in growing your business (c) generate a healthy profit and (d) pay you the level of income you deserve.
My Cash Flow Forecasting Spreadsheet will help you with this. Update the chart on a weekly basis with any new information (potential new business, additional expenses etc.). This will help you to predict your income and expenditure for the next 12 months and assess whether you’re on track to meet your business and financial goals.
Forecasting your income and expenditure is not a substitute for keeping your accounts up to date! See point 10 below.
2. Use Your Cash Flow Forecast To Inform Your Business Strategy
Once you’ve updated your Cash Flow Forecasting Chart, think about what this is telling you. Is expenditure higher than income some months? If so, your business is potentially losing money! It’ll almost certainly have cash flow problems if this is the case. Are you on track to generate a healthy profit? Have you got enough confirmed business booked? Do you need to increase your marketing activities because you’ve not got enough work coming in?
Use this information to decide what you need to do differently to ensure your business is profitable e.g. increase your marketing activity to get more prospects, reduce costs, put up prices etc.
3. Set Aside A Contingency Fund
A contingency fund is a reserve of money set aside to cover possible unforeseen future expenses for example late payment of invoices, breakdown of equipment, illness etc. The size of your contingency fund will depend on your payment terms with clients. If your customers normally settle their invoices within a couple of weeks of the job being completed, a contingency fund equivalent to 3 months of expenditure may be sufficient. If your payment terms are 30, 60 or even 90 days, then you’ll want a much larger contingency fund to ensure that your business can continue to trade if bills are settled late. The smaller your contingency fund, the greater the risk to your cash flow and business.
4. Set Up A Business Savings Account
Operate two business bank accounts, one for the day-to-day running of your business and a second to house your contingency fund as well as any other money you are setting aside to invest in your business e.g. new equipment, marketing etc. You should also store the money to pay tax bills and your annual insurance premium in your savings account.
5. Agree Clear Payment Terms
Establishing clear payment terms with your customers from the outset is important so that you know exactly when a payment is overdue. State your payment terms visibly and clearly rather than leave it up to the customer to decide when your invoice should be paid.
Being polite really does matter! A simple “please pay your invoice within” or “thank you for your business” can increase the percentage of invoices that are paid by more than 5%. Here’s a sample wording you can use on your invoices:
“Thank you; we really appreciate your business. Please send payment within 21 days of the date of this invoice.”
6. Invoice Promptly
Some factors that influence cash flow are in your own hands so invoice clients as soon as the work is completed. Not doing so can make your business look indifferent to getting paid! If you wait two weeks after the work has been completed before you invoice, don’t be surprised if it takes a further two weeks before that cash arrives in your bank account. Issuing your invoice by email will mean the customer will receive it immediately and you will have a record of it being sent.
7. Make Payment Easy For Your Customers
Making payments should be made as easy as possible for your customer. Try to avoid being paid by cheque as this will result in delays before the money arrives in your bank account. Online or card payments are a much better option.
8. Take Partial Payment In Advance
If it's sensible in terms of the price for your services, ask for a deposit or retainer up front. This is an increasingly common business practice for higher-ticket items and services; no reasonable customer should be offended by such a request. For example, you might charge a percentage of the projected bill or a set amount as a retainer before you start work on a project with the remainder due on completion of the task. Or break the bill into thirds, asking for a third before work starts, a third halfway through the project and a third upon completion. The beauty of partial payment is that it ensures that you get paid something even if the customer or client defaults on the rest of the bill.
9. Establish A Follow Up Procedure For Customers Who Miss Payments
The more quickly you follow up on a missed payment, the better your chance of getting paid. So set up a system for flagging late payments and a standard procedure for contacting the customer or client when his or her payment is late.
Typically, such a procedure starts with a letter simply stating the bill is overdue and requesting the customer's immediate attention to the matter. It then moves through a series of collection letters expressing increasing concern. If there is no response to these letters, you are left with choosing between writing off the bill as a bad debt, asking a litigation solicitor to deal with the matter on your behalf or turning the account over to a collection agency.
Nowadays there are many channels that you can use to contact the customer. However, some are more effective than others. I recommend starting out with a friendly and polite phone call to "touch base" with the customer or client. Sometimes the person has just forgotten or missed seeing a bill and a quick phone call is all it takes – meaning you get paid and you don’t have to go through any of the rest of the collections procedure. Sending out a late payment letter by email means it will get there immediately and you will have a record of it being sent.
10. Use Technology To Manage Your Accounts
Technology makes it much easier to manage your accounts thanks to cloud-based accounting software like Invoice2go and Kashflow. Not only can you create invoices on these systems, but you don’t have to worry about backing up your financial data. You can view your accounts on the move via my laptop, tablet or mobile phone. Your bookkeeper can have access to these systems so that they can input data for you and your accountant can use this information to prepare your annual accounts.