4 Key Steps Towards Better Cash Flow Management

It’s remarkable how easily companies can be blind-sided by a lack of liquidity, despite hitting or even exceeding their sales targets.

Your business’ monthly costs are less than its monthly sales, so everything’s fine, right? Unfortunately the reality can be much less comfortable.

Below are 4 key steps to managing your businesses cash flow in a better way and how to make sure you keep on top of it.

Remember, if you extend credit to your customers by invoicing them, you may need upfront cash to offer them products or services before you have been paid, so while calculating profit per unit is useful, it can be easy to run out of cash to fulfil the orders you have taken on.

Company bills or employees will not wait for your customers to pay up, so planning ahead is essential.

Keeping cash flow management under control will not only keep your business afloat, but will also gain the bank’s trust in a situation where growth is thriving and you need to borrow capital from them.

Following these four simple rules will ensure that you know the state of your business’ cash flow at all times, enabling you to react accordingly and continue to make wise and profitable business decisions.

1. Chase invoices quickly

Everyone wants their business to grow. The faster your firm grows, however, the more finance you will need to retain sufficient liquidity, as more orders cost more cash.

This paradoxical fact catches many directors out, and the first step to avoiding this is to ensure that invoices are paid in a timely manner.

Every business will have a different timescale put in place depending on the service they offer. As an example, these steps could be followed:

Chase invoices by post 2 weeks after they were sent
After 30 days, send another payment reminder
Still unpaid? Chase up by phone
Repayment plans may be offered at this point
Debtor information should then be passed to a solicitor if their debts are still not paid. They are able to threaten legal action on your behalf and begin proceedings for CCJs (County Court Judgements).

You should be aware of the amount of debtors you have at any given time; keeping cash flow in mind will help to keep your business operating day-to-day.

It is advisable to set a debtor’s book limit appropriate to your business’ capacity. Once this limit has been reached, you could ask new customers to pay in advance.

Another option is to invoice for a percentage of the fee upfront for some or all of your customers.

2. Be aware of the processes taking place

Whoever you delegate accounting tasks to, any business decision you make should be according to the cash flow projections that have been made.

Following a few simple rules could make the difference between success and failure:

Check the bank account daily
Communicate with the bookkeeper on a regular basis
Track cash flow every month

Ensuring that you educate yourself to know what you are looking at will alert you to the important figures.

Some examples are figures that appear (and, of course, are) good for business, but may not be good news for cash flow figures.

For example:

Business-to-business sales. While companies may be some of your best customers, they tend to take longer to pay up than an average micro business’ debtor, which is generally due to the fact that they will be selling the goods on at a later date.
Receivables. These are goods supplied by your business that have not yet been paid for.
Inventory. Ultimately, products that have been produced and turn into inventory (as they have not yet been sold) is cash flow lost, especially as they may cost money to store.

3. Use appropriate software to keep track

There are plenty of options for keeping your cash flow figures easily accessible and updated.

Every business has different needs, but the main figures you should aware of include:

Collection days (how long you wait to get paid)
Payment days (how long it takes you to pay your suppliers)
Inventory turnover (how long it takes to sell inventory)

Using decent software can be crucial in saving you time and money. Ensuring that the information you’re reading has been updated makes certain that you don’t waste any time chasing creditors that have already paid up, for example.

Crucially, you may think that you are aware of your company’s cash flow status without looking at the figures in detail, but this isn’t a process you can do in your head!

Remember that ‘sales’ doesn’t equal ‘money in the bank’ and, likewise, ‘expense’ doesn’t equal ‘paid for’.

4. Plan ahead

Planning in advance for seasonal spikes will ensure that you have enough cash to continue trading all year round.

For example, don’t place any large orders with your suppliers and leave yourself with limited cash flow even if you have just received several orders from customers, as they may take some time to pay.

Be aware of the bills your business is responsible for. If you haven’t retained enough cash, just one late debtor payment may mean that you’re late paying bills yourself, which is likely to incur fines and can spiral out of control very quickly.

When at all possible, ensure that you have enough money in the bank so that the bills are paid straight away.

Estimations can be very useful for later troubleshooting. Start by asking yourself what your company’s cash flow will be 6 months from now.

Are you guessing or are you taking everything you should be into account? Projecting the important cash flow figures (some of which are mentioned above) 12 months in advance, then later comparing this plan to what actually happens can help your understanding tremendously.

It is easy to overestimate cash flow projections, and noting anything that had previously been overlooked will help you to keep on top of your cash flow, and of course project future figures with more accuracy.

If your business’ cash flow is under control you are likely to be free from stress and worry.

Making sure that you have all the information you need will help to ensure that what you are doing is focused on improving the company.

Next steps

If your company is struggling with cash flow, we can help; if you need funding advice, just give us a ring on 0800 975 0380 and one of our advisers will talk through your options with you.

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