1. Understand the difference between profits and cash
It doesn't matter how good the P&L is looking - if your business isn't getting paid on time and doesn't have enough funds in the bank to pay suppliers then that could be a real problem. Profits and cash are rarely the same thing so understanding the distinction - and monitoring both - is critical.
2. Review customer payment terms
Can your customers pay up front, or in stages? If you run a service business, could a subscription-style payment arrangement work for you?
3. Maximise supplier credit
If your suppliers offer credit, consider if you are taking best advantage of the terms available.
4. Invoice promptly
Consider whether your business invoices promptly. For example, are customers billed immediately on delivery/ completion, or only at the end of the month, quarter etc?
5. Make it easy for customers to pay you
Does your business accept payment by credit/ debit card? Or offer payment by Direct Debit? If the benefits outweigh the additional costs and administration, these options might be worth exploring.
6. Monitor aged debtors
Do you frequently review aged debtors and chase overdue items? With modern accounting software like Quickbooks it's easy to get a report of what your customers owe and any overdue amounts.
7. Escalate non-payers
What process does your business operate to escalate action in respect of non-payers?
8. Credit-check customers
Credit-checking customers may be worthwhile if there are significant sums being sold on credit; having a clear process to set credit limits for individual customers may also help. Consider using a credit-checking agency like Experian; requesting bank or supplier references, and reviewing the customer's own accounts (if they will provide them), may also be helpful.
9. Consider the effect of seasonality
Consider what impact seasonality might have on your cashflows. Is there scope to 'even out' revenues? Would it make sense to revisit the timing of discretionary expenditure bearing in mind the pattern of cash inflows?
10. Forecast cashflows and anticipate any funding needs
Producing cashflow forecasts to identify and address - in good time - any funding shortfalls makes a lot of sense. With cloud integrated applications like Futrli this is now easier than it used to be. If your business is growing rapidly, forecasting becomes essential, to try to prevent over-trading issues.
11. Pace expenditure
Where the business has discretion about the timing of expenditure, consider how best to pace that expenditure so as not to exhaust available cash.
12. Renegotiate terms with the bank
Not easy this one, but consider whether your business is getting a good deal on any overdraft or debt finance and whether there is any scope to restructure/ renegotiate terms?
13. Is the debt structure right?
Consider whether the business's borrowing is appropriately structured. Typically, fixed asset purchases will be financed with longer-term debt (e.g. term loans or asset finance), whereas shorter term needs such as working capital requirements will be financed with short term debt (e.g. bank overdraft or invoice finance). If there is a mismatch, there may be a need to restructure the debt.
14. Have a clear plan and targets
It will probably be a good idea to have a clear business plan and targets, against which the business's performance can be measured. This should extend to short-term cashflow targets - knowing what the bank balance is, and monitoring how much is going out and how much the business needs to bring in each month is a fundamental discipline.
15. Offer early payment discounts
Some businesses may find it helpful to offer customers a discount for early payment.
16. Charge interest to late paying customers
Consider whether your business could charge interest to late-paying customers. This needs to be approached with care but in some cases could act as an effective deterrent to late payment. Government guidance on charging interest to late commercial payers is here.
17. Keep accurate, up to date financial records
Without accurate, up to date financial records about the business's financial performance and position, there's no hope of managing the cashflow properly, or indeed any other aspect of the finances. Do it yourself, have your team do it, or outsource it... whatever, but do make sure someone is doing it.
18. Review your management information regularly
The financials should be monitored regularly, and the likely impact of any major developments upon cashflow assessed and acted upon promptly.
19. Make the business's money work
Consider whether any spare cash is being applied to generate a satisfactiory return. This could mean investing it for a return; or applying it to some business purpose. Liquidity, risk tolerance, and opportunity cost are key considerations here. If there is excess cash, should it be returned to the shareholders?
20. Don't overstock
Are there sound commercial reasons to maintain stock at current levels, or is there any scope to safely reducing stock levels, thereby freeing up more cash?
21. Sell underutilised or obsolete plant & machinery
If your business is sitting on underused or obsolete items of plant & equipment, consider whether it would be better to sell those items to generate cash.
22. Use a collections agency
It may make economic sense to use a debt collection agency to pursue outstanding debts; consider also the impact on reputation and customer relationships.
23. Avoid scope creep
If a price has been agreed but the nature of the product or service the customer requires then changes, does your business renegotiate the price and terms?
24. Review payroll frequency
Since the advent of Auto Enrolment, increasing numbers of small businesses are moving from weekly to fortnightly, or even monthly payroll. Could this improve cashflow in your business, as well as reducing administrative costs?
25. Repair vs replace
Is there scope to repair, rather than replace, tangible assets such as plant & machinery or fixtures & fittings? Could this improve cashflow?
26. Buy second-hand
There may be merits in buying equipment second-hand, rather than new, if purchase costs can be reduced without unnacceptably compromising quality.
27. Lease or buy?
It is often argued that it is better to lease, rather than buy, certain items of plant & machinery, especially those which depreciate in value quite quickly. By leasing assets, can more cash be retained for use within your business?
28. Shop around
Does your business shop around for big-ticket purchases, or just accept the first quote?
29. Increase your prices
Raising your prices can have a dramatic effect on profitability and cashflows. The maths behind it is pretty compelling - read our article "Should I raise or lower my prices?".
30. Use e:invoicing
Electronic invoicing is gradually replacing traditional paper-based invoicing methods, and with good reason; it offers the potential to invoice more efficiently, get paid quicker, and book the transactions in the accounting records automatically.
If you would like to discuss any of the above points in relation to your small business, please contact us today.