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Maximising Cash Flow is key to staying competitive in a changing environment

Paul Grace

Paul Grace
Finance

Posted on: 07/06/2018

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The health of any business is a combination of Turnover, Cost & Cash Flow. Most businesses simply focus on turnover and profit, ignoring cash flow. Many businesses fail despite a healthy order book because they have been unable to be deliver due to a lack of cash flow and an inability to invest.

Here are nine ways to maximise business cash flow…

1. Speed up receipt of cash

This is easy to say, but less easy to do! Don’t wait until the month end to send invoices – send them out immediately after the delivery of goods. Another idea is to change your payment days, for example from 90 to 60 days.

Offer a small discount to customers who pay their bills early and don’t be afraid to charge a penalty to those who pay late, after all it is you who are then funding their business.

2. Maximise the use of technology

Ask your customers to pay you via BACS and encourage them to do this by putting your bank details on your invoice and specifically stating payment by BACS only.

These payments avoid the old age problem of the cheque being in the post and as well as having to wait for your cheque to clear via the banking system. Typically, cash finds its way into your bank account about one week quicker than a cheque.
If a payment can’t be made by BACS, consider if you can take an alternative payment via credit, debit card or pay-by-link

3. Credit Control Systems & Procedures

Credit control is not a mysterious art form. The ad-hoc chasing of payments will result in payments being received ad-hoc, so ensure you are regularly in touch with customers and suppliers.

Regular credit checks are key to understanding your customers and their businesses which may impact on their ability to pay you. Don’t be afraid to ask for payment up front on large orders to secure their commitment and keep them focused.

4. Maintain a Frequent Dialogue with your Clients

Regularly speak to your customer to let them know an invoice is on its way or to chase it up. The more you are talking to your clients, the less likely they are to sit on your invoice. It’s good to talk as it further develops your relationship with them and this may lead to further opportunities. It also gives you an indication if for any reason they are struggling for cash or running into potential problems.

5. Avoid Concentration of Customers and Suppliers

If it’s possible, make sure you don’t have any exposure to any clients or suppliers over 25 per cent of your turnover. If something happened to one of these clients or suppliers it could have severe and drastic consequences on your business and seriously effect cash flow or the ability for you to complete your orders.

6. Forecast your Cashflow

Many businesses go through seasonal highs and lows and a cash flow forecast can highlight these in your business. Not only will a cashflow forecast give you an idea of what you can afford to spend, it will also allow you to consider the right amount of staffing your business needs and, in quiet times, what other activities you can do to boost your business moving forward.

A cashflow forecast gives you fantastic future visibility into your business and spot problems or opportunities before they arrive.

7. Get your financing mix right

Make sure any fixed asset purchases are matched by long-term funding via bank loans or Hire Purchase rather than you using valuable cash or your overdraft facility. This will free up some cash that can be used to tide the business over if cashflow is ever tight or if one of those debtors takes slightly longer to pay your invoice.

8. Drive Sales Continuity

Another way to improve cashflow and drive turnover up is to offer a small discount on your products or services to customers who buy them for a fixed period of time. You get the benefit of locking your customer in over the medium to long term, get the cash in up front and your customers save money on a package of goods or services at a modest discount.

9. Work with professional partners

Don’t see professional partners such as accountants, bankers and lawyers as an expense but rather an investment. For example, an accountant can review or complete your cash flow forecasts and undertake appropriate sensitivity analysis which may highlights areas you have missed. Work with your bank to get a suitable funding structure in place as they should be able to offer several alternative funding strategies which you may not have considered.

About the author

Paul is Area Manager for Yorkshire Bank’s Commercial Banking team, working across Manchester and Merseyside.

Paul joined Yorkshire Bank in 1995 and has over 20 years working with and advising SMEs in our local communities.  Paul advises clients on all finance related matters and has a demonstrable track record in formulating working capital strategies to fund client’s growth aspirations.

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