Managing cash flow - what the latest reports tell us
March 30, 2017
Luisa Grey, a director at Eazipay Ltd, one of the UK’s largest Direct Debit processing companies, knows a thing or two about managing cash flow. Here she highlights what the most recent reports tell us about managing cash flow and how you can avoid the traps.
A raft of new reports on SMEs and cash flow last month has underlined the unnecessary time and money being spent on managing company cash flow.
While technology has enabled businesses to simplify many aspects of their day-to-day operations, daily cash flow management is still a challenge for UK SMEs. A recent survey found that SMEs are collectively losing over £8.72 billion every year as a result of the time taken to complete weekly finance related tasks.
Another study revealed that more than six out of 10 business owners regularly, or occasionally, draw upon personal finances like a personal credit card to support their business.
And with 15 per cent of SME start-ups also saying that they found this to be an issue, what can we do to avoid unnecessary cash flow volatility and business risks?
It's critical to make sure, that alongside your profits forecast, you also have a cash flow forecast. Review it regularly to ensure you have the best toolkit to equip your business for managing payments and dealing with the unexpected hurdles that all businesses face from time to time.
Appoint someone to keep an eye on the cash. When the levels fall below a critical amount (which could be anything from £1,000 upwards depending on the size of the firm) they need to let someone in authority know.
Make paying simple for your customers. Cheque writing is tedious for everyone involved. Electronic payments are much quicker and the money will be in your bank account sooner. Customers can also be offered early payment discounts to encourage them to pay within a timeframe which works for you.
Look for and negotiate longer-term deals and business partnerships. Think about differentiating your services from your competitors by offering alternative billing arrangements, including the use of classic retainers and monthly payment schedules, to enhance your competitive edge.
There's nothing like getting all your customers on to Direct Debit to make life easier for everyone and really stabilise your cash flow. Most of the time, automated processes are just better (how much time do you spend chasing invoices?) and can leave you to spend your time more efficiently.
Invest in effective alternative financing solutions such as invoice or supply chain finance. Don’t rely excessively on loans and investments – this will affect your ability to manage cash flow effectively.
Don't be a late payer yourself. Not only will it reflect badly on your company, you could incur unexpected costs and charges. Signing up to the Prompt Payment Code and, where possible, working with other companies that are signatories to the Code is another quick and easy step to take. The Prompt Payment Code sets the gold standard in payment terms and its members have made a commitment to lead the way in payment practices.
Finally, if you are having a cash flow crisis, talk to your bank. They might well be able to help you out with some short-term funding and give you sound advice on how to avoid a similar crisis in the future.
It’s true that if a company has poor cash flow for a sustained period, it is at grave risk of going under, no matter how profitable it looks on paper. This is because although it may have a substantial order book, if it's not getting the money in from its customers fast enough to pay for the employees and goods and services needed to fulfil those orders, it’s unlikely to survive for long. However, taking the steps above, you can start making sure you cut down on the stress and set your business up for continued success.
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