Effective Cashflow Management Strategies
Jessica Jones, Obp Chartered Accountants | 25th January 2020
Sir Richard Branson stated: ‘never take your eyes off the cashflow because it’s the lifeblood of business’. Branson’s business ideas would have never materialised if it wasn’t for his control over cashflow, and his understanding of cashflow management that sees businesses thrive and survive!
According to the Office of National Statistics, bad cashflow management is responsible for up to 90% of business failures. In April 2019, Intuit Quickbooks conducted ‘The State of Small Business Cash Flow’ – a research project which focused on cashflow experiences of self-employed workers and small business owners. https://quickbooks.intuit.com/blog/news/small-business-cash-flow-the-state-of-payments/
Their research concluded that:
- Nearly 1 in 7 small business owners have been left unable to pay employees because of cash flow issues. This equates to a huge 2.2 million people in the UK not being paid on time.
- 38% of small business owners who have suffered cash flow problems have been left unable to pay debts.
We often see the effect that faulty cashflow management, and especially late payments, has on our clients, so here are Obp’s top management strategies for dealing with cashflow:
- Get disciplined with your invoicing and raise invoices immediately! Customers won’t pay if they haven’t been invoiced.
- Consider asking for deposits and/or milestone payments if you are working on long projects as this will ensure that you are paid throughout the process.
- Sell unused/redundant stock or equipment at a discount price, even if it’s sold at a loss. This way you can free up capital and space that could be used for some other purpose.
- Make it easier for customers to pay you by setting them up on an automated payment service, for example a direct debit facility like GoCardless or get them set up on a standing order. This will help you get paid promptly and will also allow you to predict more accurately when you will receive money into the business. The automation of payments also saves a huge amount of time in chasing customers for payments. You can also offer various ways of paying such as PayPal, ApplePay, bacs etc so the customer has options.
- Offer incentives for early payment i.e. early payment discounts and/or penalise for late payments. There are fixed prices and interest rates that you can charge for late payments. https://www.gov.uk/late-commercial-payments-interest-debt-recovery/charging-interest-commercial-debt
- Chase bad debts quickly because the sooner customers realise you are chasing up missed payments, the higher you will be on their priority list of people to pay. If you are having problems with this ask advice from your accountant on whether software would be able to help with this process.
- Have a look at the information provided by The Office of the Small Business Commissioner (SBC) which provides advice and support on ensuring that small businesses get support in resolving their payment disputes with larger businesses and ensures that fair payment practices are adopted. https://www.smallbusinesscommissioner.gov.uk/
- Review your purchase strategies to see whether they are needed and whether they will add value to your business. By reviewing your purchases, you may identify you have no further need for some products such as specific insurance policies, support packages, software or marketing activities. For example, marketing done correctly can break you out of a rut, lead to sales and help with cashflow. However, it’s important to revisit your marketing strategy to identify if you aren’t getting positive returns for your money.
- Review the prices that you pay by getting into the habit of getting quotes, shopping around for better deals and always asking for discounts. Also always look at comparisons for energy suppliers. You could save a fortune by switching.
- Making more frequent payments to your accountant etc can save on larger annual bills, and ensure that you know and diarise your larger liabilities such as payroll, taxes or other expenses.
- Keep your stock levels as low as possible to save on tied-up cash and storage costs.
Know Your Business:
- Be aware of seasonality in sales in your business whereby you may need a ‘slush fund’ to manage quiet times of the year.
- Ensure that you are on the best VAT scheme that suits your business needs. Usually, the amount of VAT you pay to HMRC is the difference between the VAT on your sales invoices, and purchase invoices. You report these figures and pay money to HMRC even if you haven’t been paid for all the invoices you have raised. With the Cash Accounting Scheme, you pay VAT on your sales when your customers pay you, and you reclaim VAT on your purchases when you have paid your supplier. Not all businesses are able to do this, so you will need to speak with your accountant or HMRC for advice.
- Having a line of credit on standby with banks or other financiers can help you boost your cash flow, which can be a lifeline for small businesses looking to bridge the gap between just ‘ticking along’ and ‘high growth’. You could look at securing a business loan or getting yourself a business credit card and using it responsibly. Whilst this can boost your cash flow, it may also help you build an all-important business credit rating.
- Communicate how important cashflow is to your employees. Sales staff should ensure that sales invoices are paid in full and on time, and project workers should ensure that projects are completed within budget and within the necessary parameters to avoid any late penalties.
It is important to remember that all types of businesses struggle with cashflow management at some point. However, there are ways of dealing with difficulties in cashflow by being pro-active. Along with the strategies discussed above, we also recommend speaking to a good accountant and ensuring that you use a quality accountancy software package in order to ensure that your accountancy information is as up-to-date as possible. We also recommend businesses having management accounts completed which allow you to foresee potential difficulties.
Management accounts can be as detailed as you wish and will help you better understand your own business. It will allow you to identify when cashflow will be difficult in the future, trends in your sales and profit margins, Management accounts will allow you to have better control over your costs and help you to plan for growth, diversification or expansion of the business. They will also assist you with your tax planning and may even identify ways of saving tax.
Statistics show that businesses who understand cashflow management and have good working relationship with their accountants are far more likely to succeed and prosper.
If you require any further information on this topic or any other accountancy or business advisory issues please contact Obp Chartered Accountants on 02921 676555, or via email at email@example.com