People who don’t run their own business think it’s simple. You sell your service or product, make money, then pay all your suppliers, employees and bills. But what happens if things don’t happen in that order?
The truth is that they rarely do. Even the very best businesses, with brilliant sales numbers, the most talented staff, the best products and services, and the happiest of customers, can be brought crashing down by cash flow problems. Failing to get an invoice out on time might mean your company income is below forecasted and a late payment from a customer could mean you struggle to pay your workers’ wages.
As business owners, we must take responsibility and take action. By keeping your invoices and payments organised, you keep your company running smoothly. Here are our crucial tips for making sure your business doesn’t run out of cash.
Managing cashflow - check the forecast
Knowing the type of incoming cash flow you’re going to have in advance means you can plan your outgoings around it. There are generally two types – smooth and lumpy.
Smooth Cashflow – This is when payments come into your account every day or every other day. This is usually the case for more simple services and products with low order value.
If your business has smooth incoming cashflow, you can take all the cash you’ve earned in the last two months and divide it by sixty. You can then use this figure to estimate how much cash you’ll bring in next month. You can then work out if you will be bringing in enough money for all your bills and expenses in the near future.
Lumpy Cashflow – This is when your business can go days, weeks or months without any cash coming in. If you work on large-scale and complex products and services with very high order values, it’s likely this is the kind of payments you will receive.
We would all love to see a large lump sum of money suddenly in our bank account, but it can be easy to get a little ahead of yourself.
Facilities may need renovating or new equipment need purchasing but cash flow forecasting could suggest that company money may need to be rationed out to make it through the next month of trading.
When is your next project? How much will it pay? When? Will it be enough to cover all of your expenses or will you have to find another source of income?
When you receive large payments at different intervals it is extremely important to be organised. Make a note of all your projects for the next few months, when you’ll receive payments and the amount you’ll be paid for each.
Remember to take into account the individual customer and their history on late payments to make sure you cover yourself in advance. Then you can put aside money for each of your expenses.
Some bills are paid at the same intervals for everyone. When you know how much money you will have coming in, you can confirm the bills you will be able to meet and those you will have to make alternative arrangements for if you can’t.
Make sure you are prepared for the key dates in any business owner’s diary:
- 1st day of the month – business rates and commercial mortgage (if you own your premises)
- 7th of the month once a quarter – VAT day
- 22nd of the month – PAYE reconciliation
- 25th of the month once a quarter – rent day (if you’re in leasehold premises)
- Last Friday of the month – staff and director pay (minus income tax and both NICs)
Managing cashflow - give your customer as many options as you can
Some customers are easier than others. You will undoubtedly have one or two who respond to your invoices straight away and pay promptly. Then there are those who require chasing up on every single payment.
Depending on who is in charge or their style of business, your customer may have their own preferred method of payment. Being open to the way they do things and accepting any kind of payment will make things quicker and easier for everyone involved.
Cheques are old school and they can be a bit of a hassle. Waiting for a cheque to arrive in the post, taking it to the bank, then waiting for it to clear and for the money to actually appear in your account is a painfully slow way of doing business. And there is always a chance that it could bounce and double your waiting time.
But for a customer that deals solely in cheques with all its suppliers or one that is unhappy using that new “interweb thingy”, it is much easier to just accept the cheque rather than cause a disagreement when you want their business.
For customers willing to pay by direct bank transfer, be grateful. Many companies now are also happy to make payments by credit or debit card and by direct debit. These transfers are usually immediate and can be accessed right away. The fees sometimes incurred are getting lower all the time and often cost less than the handling fees with cheques and cash deposits.
Direct debit is ideal for customers you bill regularly. You simply agree a date with your client for the payment too be taken out, and make sure you include for every product or service provided on the bill and money transfer request.
Is the payment lead time in your industry much longer than most? Do you have to wait 60, 90 or even 120 days for payments?
There is also the option of invoice factoring. Put simply, you are paid up to 90% of the bill when you give the invoice to your customer, then receive the rest when they have settled up with the factorer.
However, you will only be paid on completed work so factorers won’t have the option of milestone payment jobs (unless it’s in construction) and each of your customers will be assigned a credit limit.
Managing cashflow - chase up your invoices
Getting your invoice out to the customer as quickly as possible is vital. Some clients are prone to paying late, so you don’t want to add to your own waiting time.
Have a set trigger point for your invoices. Will they be sent as soon as the order is placed or completed? Or will there be multiple invoices throughout the project? Make sure your terms of payment are clear.
Try to make your payment terms work in your favour. Others may do 30-day invoices, but if 14 days eases your cash flow problems, then see if the customer will agree. Some won’t, but if it’s always worth asking.
Managing cashflow - talk to your customers
One of the most effective ways of solving your cash flow issues is by speeding up payments. You may try to encourage a customer to pay before the end of their invoicing period, ask for payment upfront, or offer incentives like a discount for early payments.
You could also discuss multiple-stage payments with your customer for large orders and long-term projects to help cover costs. Your customer may be experiencing cash flow problems of their own and appreciate being offered different payment options.
Managing cashflow - talk to Panthera
Want our help with cash flow? Please call Panthera on 01235 768 561 or email the team at email@example.com.