Cash flow is perhaps the most important aspect of any business. Without it, no matter how big, successful or good with sales and profits you are, a business will struggle. Sales and profits indicate the business is working and doing things right, but if the money isn’t coming in quickly enough to cover daily, monthly, quarterly or yearly liabilities, you could find yourself in a dark hole when it comes to repaying debts and creditors. Sometimes it can happen through no fault of your own, you could just be unlucky, broken machinery, a dip in seasonal variation, these things aren’t always predictable.
So how can you prepare yourself? How can you maximise your cash flow and ensure you don’t hit any trouble?
Plan and predict
For new business, or growing businesses, it can be easy to anticipate that the business will hit troubles with cash flow. With so much initial expenditure and potential teething problems as the business finds its feet, most owners will know the dangers of running into cash flow troubles. A cash flow forecast is the best place to start. With a forecast you can have a rough idea of your incomings and outgoings. If you plan well enough, you can have an idea of your daily incomings, outgoings, as well as monthly or quarterly bills.
It also gives you a chance to identify potential flaws and areas of the business which could get into trouble. Understanding your clients, how they pay and how reliable they are at paying will help you plan for all possible eventualities.
Take greater control of incomings and outgoings
Having control of your incomings and outgoings seems very straightforward and simple. But unfortunately, it doesn’t always work out like this. As bills pile up it can be hard to keep track of where all the money is going and if you are constantly waiting for clients to pay, things can get ugly.
What can you do?
- If you don’t do so already, make sure that you carry out credit checks on all of your clients. This will give you the best idea of their creditor history, their reliability and most importantly how likely they are to pay.
- If you are waiting on late paying clients be assertive. You are completely within your entitlements to ask someone to pay up if they are late. A phone call or email is much better than doing nothing.
- Try to make it your business to collect upfront deposits for work. If you’re able to bring some money into the business, it can make cash flow that much easier, especially if you may not receive full payment for a while.
- Maximise your own repayment terms – If it can be a help to the business, pay on the last day of your outgoing contracts. If you have the option to pay within 30-days, there is no problem in settling payments on the 30th day.
Carrying out credit checks on your clients should be your number one priority. This gives you the most significant indication of how efficient your clients will be when it comes to paying on time and in the full amount. It does not guarantee better clients, as even late payers can have a good credit score.
In terms of communicating with your clients, there is nothing wrong with giving them a gentled nudge of encouragement for the money they owe you. When a client doesn’t pay on time, it has the potential to have a big knock on effect in terms of cash flow, so you are more than within your rights to remind them.
Taking deposits from clients can be a huge benefit. Bringing some money into the business is better than none and it can massively ease up cash flow problems. Not only does it ease pressure on you, but some clients may prefer making staggered payments.
Cash flow is already bad – What can I do?
Depending on the finances of the business and how bad things are, there are a variety of different solutions available.
Invoice finance facility
Late paying clients are one of the most common causes of cash flow problems. Sometimes it not down to the amount of sales you make, but the reliability of customers paying you. Invoice finance is one of the best solutions for overcoming this problem. An invoice finance facility, is effectively where a factoring facility will give you an advance based upon the value of your invoices. They will first assess the quality of your invoices and your clients credit history. If all deemed not too risky, the factoring company will advance you up to 90% of your invoice, before going and collecting the money owed directly from your client, they will then take what they are owed along with their fees before returning the change.
There are many different forms of invoice finance, with invoice discounting a more discreet version. There also some factoring companies which work specifically in certain industries, such as recruitment construction or the health sector.
Formal Repayment Plans
If invoice finance isn’t a viable option and creditor pressure is very intense, a formal repayment plan may be the best option. A procedure such as a Company Voluntary Arrangement (CVA) or a Time To Pay Arrangement (TTP).
A Company voluntary will give you protection from creditors as well as a means of repaying your creditors slowly over time. The business pays a monthly fee towards their creditors, based on all of their incomings and what they can realistically afford. An arrangement like this would generally last around five years. But, your creditors will only agree to this if it provides a better return than forcing you into compulsory liquidation. A TTP is similar, but is only used with HMRC.
There are several different forms of asset finance, each with their own benefits which could prove valuable to your business. If your business needs new equipment or machinery, leasing or hire purchase are a great solution as they allow you to pay for the products over time, as opposed to spending one large lump sum which could disrupt cash flow. Alternatively, if you have lots of quality assets, but not any cash, you can take out loans based upon the value of your assets.
It is always better to plan ahead and ensure that the business stands the best chance of survival before you start working. However, if you do find yourself in a sticky situation, there are solutions available to pull yourself out of trouble.