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Home » Featured, Finances, New Here

5 Ways to Improve Cash Flow

LET US ALL APPLY FOR OUR SHARE OF THE STIMULUS...

Are you a business owner struggling to collect debts from customers?  If you’re serious about making strategic changes to your business to collect debts faster, read on.

Cashflow is like oxygen to a business, the more oxygen you have the better your chances of survival.

In difficult times most businesses report that their customers are taking longer to pay their invoices. But when you have bills of you own to pay this doesn’t always make things easy and consequently cash flow becomes a big issue.

In theory managing cashflow is a simple enough concept:  simply collect the money owed to you (recievables) as quickly as possible and take as long as possible to pay your suppliers (payables) without jeopardizing your relationship with suppliers.

However some businesses are better at it than others!

Quick Fix

Although this article is not about quick fixes, it’s about improving your business processes so that you can maximise your cash position.  Here’s a quick fix for you: pay your suppliers by credit card.  With bank transfers or cheques the suppliers get paid at most within a few days, however with a credit card you normally get around 6 weeks interest free credit. The danger here of course is that you charge too much to your credit card which means you can’t afford to pay it, if you do you’ll get some nasty interest charges.

Similarly if you’re wanting your customers to pay you more quickly then accept credit card payments, but be aware of the transaction and equipment costs of accepting credit card payments.

But if you’re serious about collecting debts faster and improving cash flow, here are five tips:

1. Cashflow Forecast

The first step to collecting debts faster is to understand your cash position and where you’re likely to be over the next 12 months. What are your likely outgoings going to be over this time? Remember, growing businesses require more cash. Boo.com went under in 2000 having spent $135m of venture capital in 18 months.

Simply, a cashflow forecast is your expected income broken down into months offset by your outgoings, if the resulting figure is negative you need to borrowing money, if it’s positive, happy days.

Although a 12 months rolling forecast is sufficient for many businesses, depending on the business, weekly cash flows for 1-3 months might be more appropriate. In some instances, daily.

Remember, if your pay your suppliers within 30 days and your customers pay you in 45, that’s 15 days cash float you have to cover, which is why it’s vitally important that you have a robust cash forecast to determine whether or when you will need borrowings so you can set up facilities in advance.

Download a Free Excel Cashflow Template

2. Terms of Business

Most people think of the terms of business as something that hides away at the back of the contract or somewhere on the website. But now is the time to dust it off and review it.  If you’re wanting your customers to pay you more quickly then you need to make it clear in the terms of business for any new customers that you deal with.

Existing customers might be more problematic if they already have existing contracts with you. You may need to seek legal advice or enter into discussions with your customer.

If you decide that entering into negotiations with the customer is the right thing to do to get better payment terms be aware that it’s highly unlikely that your customer is going to willing you pay you early without something in return. Which usually means a price reduction.   In such circumstances it’s probably better to give the customer a prompt payment settlement rather than across the board price reduction for accepting the new terms and they continue to take the same length of time to pay.

Credit Policy

Allied to your terms of business is your credit policy. When you provide goods or services on terms, you are in effect giving the customer credit. Are you sure that the customer is good for the money?   Setting a credit limit or taking payment in advance, might be advisable for new customers as would checking the customer’s credit status with a credit reference agency.

Just because a customer has been trading with you a while, it doesn’t mean that everything’s ok. Check your customers regularly, especially if customer’s payment habits suddenly start to change.

3. Who owes you money?

Draw up a list of who owes you money broken down  by payment due date. Don’t just look at the customers past the 90 day mark (althought that’s very important), look at the customers in the 31-60 days columns too.

  • Start calling the customers and find out if there’s a problem with the invoices and resolve any queries quickly. Have processes in place for resolving invoice queries.
  • Have a process in place to call customers before the invoice is due to find out if there are any problems with the invoice
  • Get commitment from customers to a payment date, then phone them before and on the agreed payment date to confirm it’s on the payment run.

Key to faster collection of debts is to have processes in place before the invoices are due.  Which could include invoicing earlier, for example instead of waiting until the end of the month to raise your invoice raise it the day the service was performed or the goods delivered.

4. Collections Policy

Establish a collections policy within your business, are you going to pursue debts through the courts (expensive and sometimes difficult to enforce, especially if the business has ceased trading) or are you going to write the debt off (which will be an expense to your business).

  • Decide what your policy is on taking legal action  – what stage do you start using debt collectors?

Whilst it’s possible that having a tight credit policy and strict collection rules will lose you business, it will minimise your risk of defaulting customers which could mean that you don’t have a business at all.

5. Reporting and Target Setting

In many organisations it’s not unusual for sales people to get thier bonuses before the customer has paid.  In some situations I’ve known sales people to have been paid thier commissions or bonuses and leave and the customer default on payment.

Making the sales people part of the collection process is vital as it helps to ensure greater accuracy of invoicing (ensuring the customer gets exactly what they wanted) and incentivises them to get quality business, rather than any business.

Consequently ensure that your sales people ‘s bonuses/commissions are linked to supplier payment or if they have a small commission and end of year bonus, link bonus payment to the debt position of the the portfolio of customers they are responsible for.

Set targets amongst your accounts recieveable staff for the amount of money they collect each day/week and track it. If you have a team rank the amount collected by staff member.

Final thoughts

Make cash collection a company priority and make sure all emplyouyees know that.

What are you doing about collecting debts faster in your business?

Empire Building Kit

4 Comments »

  • Alex Aguilar said:

    The annoying thing about debt collection is no matter how much time and effort you put into collecting money and keeping your cash flow positive, you will inevitably reach the point where you will have to write off some of the debt as a loss or forward it to a collections agency which, in my opinion, is as bad as a loss.

    Matthew Needham Reply:

    Hi Alex

    You’re absolutely right a bad debt is an expense. Which is why more effort needs to be put in up front to prevent the debt becoming bad, by ensuring you only give credit to the lowest risk customers. At the end of the day providing credit is a risky business. The banks charge for lending money and arguably have a robust lending policy, yet still get it wrong.

    It’s often tempting, especially for new and growing businesses to give credit to get the sale, all too often without any appreciation of the risk.

    Thanks again, Matthew

  • Stephen said:

    Bad debt risk is a normal part of business risk. For most B2B businesses there is an expectation of credit and you may struggle to win business if you do not accept this. The key is to manage that risk.

    Do credit checks & seek trade references before granting credit. Use credit limits and stick to them, make sure that if a debt goes bad it doesnt take your business with it. Chase all due debts aggressively the older a debt becomes the more likely it will remain unpaid.

    Matthew Needham Reply:

    You’re absolutely right it’s all about risk management. The trouble is most businesses adopt a care free attitude to what is in effect lending them your money.