Thu 11 / 06 / 20
How to improve your cash flow
In these strange times, many businesses are facing cash flow problems. Understanding cash flow and how you can manage it could help to reduce these problems and improve your financial position. Here are six top tips to help you improve your cash flow.
By David Rainford of Galloways Accounting
1) Understand your business’ cash flow
Cash flow and profit are often thought of as the same thing. In reality, this is rarely the case. A profitable business can still face cash flow problems, and companies making losses can often operate for years.
Several factors create differences between cash flow and profit. If you buy stock with cash, then you are out of pocket until you are able to sell it, even though you’ve made no profit. When you send an invoice, you may have a profit in your books; but until they pay you what they owe, you still have no cash flow.
It’s tempting to focus on profits but cash flow keeps the lights on.
2) Actively manage your working capital
All businesses have some element of working capital – i.e. money that is tied up.
The longer it takes your customers to pay and the more stock you have, the more money you have tied up in the business.
Lacking cash doesn’t just mean you might struggle to pay bills, even a healthy business may miss out if it doesn’t have cash available to take advantage of a new opportunity.
Taking control and actively managing your cash flows is essential, so this needs to be a focus for any business owner.
3) Focus on collecting cash from your debtors
Debt collection is likely to be the most common cash flow issue businesses face whilst things get back to normal. Keeping on top of your debt is a case of maintaining honest external relationships and good internal discipline.
There are a few key processes which are simple to implement, which will allow you to collect cash more quickly:
- Review your ‘order to cash’ process. Focus on accelerating steps to produce invoices and issue them as early as possible. If you work on long-term projects, invoice before the start of the contractual period if possible, if your terms allow it.
- Speak to your customers before you invoice. If invoicing is correct and accurate, it prevents delays for credit notes and re-invoicing.
- Make sure all invoices and payment methods conform to customer processes. Clients may change their processes, so maintain a dialogue with clients to understand this and prevent delays.
- Communicate the focus on cash to your whole team. Allocate roles and keep the team up to date on progress, so they understand the importance.
- Keep records of interactions. Being able to go back to customers with specifics of conversations and dates will give you a much stronger footing.
- Honesty is essential. Your customers are likely in the same situation as you. Having open, honest conversations is essential, but don’t let go of the fact that you’ve done great work and should be getting paid for it.
4) Manage your stock
Large amounts of stock are likely to take a long time to sell. Until the stock is sold, your money is tied up.
While bulk buying might offer a discount, credit card charges and bank interest can build up quickly. Holding a smaller amount of stock might be more cost effective, and it allows you to be more flexible as you aren’t committed to a single product.
5) Take control of payments to suppliers
How you pay your own bills gives you an element of control.
Holding payments means you can hang onto the cash a little longer. Consider setting up a payment for the bill’s due date, that way you know it’s handled.
If you have a strong relationship with your supplier, you might also be able to negotiate more time to pay. The key is being open and honest about your situation.
6) Consider your sources of finance
Small businesses have more sources of finance available than ever before. Low interest rates and government backed schemes mean that there has never been a better time to look at how your business is financed.
If you find yourself making regular use of your overdraft or credit card, you may be paying more in interest and bank charges than you realise. Short term finance is one of the most expensive options, and a business loan may be more affordable.
Re-financing can also provide the opportunity to expand or revitalise your business, and this may be the perfect time to do it.
Please feel free to get in touch with David and the Galloways Accounting team on 01273 324163 or at wearegalloways.com.
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