John Davies provides eight top tips for businesses to plan ahead and avoid cash flow problems this financial year.
Ensure you look after your existing customers
For many SMEs, efficiently managing cash flow can mean the difference between success and failure. With the first quarter of the year usually being a time when many SMEs have difficulty with cash flow, forward thinking and planning ahead can help save you many a headache.
(1) Monitor your cash flow
You may think of a cash flow forecast as something you include in a business plan, or use when seeking funding, but it's an incredibly useful thing to do on an ongoing basis. Month-on-month forecasting lets you plan ahead, determine your financial position and predict when you might run into difficulties giving you the ability to make sure you have enough income to cover your outgoings.
(2) Make friends with your accountant
Many of us are guilty of only speaking to our accountant once a year, usually around the time that a tax return is due and typically without asking any questions, but they can be a fantastic source of money-saving information and advice. It is always worth identifying areas for improvement and ascertain whether there are any ways you can reduce your tax bill. While accounts aren’t due until nine months after the end of the accounting period, sending them to your accountant straightaway can also help you get ahead of the game. Accountants won't charge you extra for being well organised, and you'll have your figures sooner, as well as being sure to avoid a late filing penalty or interest on late payment.
(3) Credit where credit's due
It's exciting to bring new business on board, but it can also be expensive if you perform services or order stock in advance of payment. It's therefore wise to have new clients complete a credit application form in addition to the usual contract and agreement to T&C’s. Ideally, you should raise invoices with partial or full payment in as this will ease your cash flow. If this isn’t possible, you need to weigh up whether you're willing to extend credit. Make sure you perform due diligence on any new clients – it’s easy to perform basic checks using free services such as Duedil or Company Check before deciding whether to purchase more in-depth reports, so there’s no excuse.
(4) Invoice throughout the month
Many businesses make the mistake of bulk invoicing at the end of each month, potentially leaving themselves short if and when unexpected expenses crop up. It’s good practice to spread invoices out throughout the month where possible, as this will provide a more steady flow of income. Many accounting programs allow you to schedule recurring monthly invoices, so it needn’t be a chore.
(5) Master the art of credit control
You should also monitor your debtors on a weekly or fortnightly basis rather than leaving everything until the month end as this gives you the grounds to chase your customers for late payments. Some may not settle outstanding invoices without a prompt, others may simply have missed the original invoice or forgotten to pay it. However, if they haven't paid because they're running into problems, it’s better to be aware sooner rather than later.
Taking a personalised approach to credit control can really help. Most people can spot an automated email, but you can significantly improve your response rate by writing to the debtor personally. If they’re having cash flow problems, debtors are more likely to prioritise your invoice if they know you've personally noticed it's overdue. If that doesn’t work, follow up your email with a phone call. People respond to people.
(6) Save for a rainy day
Set up a separate deposit account. Work out your average VAT, PAYE and Corporation Tax for the previous year, divide it by 12 and set up a standing order to so you can start saving now. This money will give you peace of mind when tax bills arrive.
If you are fortunate enough to have good cash flow during particularly profitable months then consider making additional payments into your deposit account; you could be earning interest on this money as well as being able to fall back on it during difficult months.
(7) Use the credit you already have wisely
Take a look at how you're using the facilities you already have. If you have an overdraft that you use frequently, it won't be a buffer when you really need it, so aim to reduce it a little each month with a view to always having a positive balance. If you've got a company credit card, track your spending. Keep a spreadsheet with details of any purchases you or your staff make to keep surprises to a minimum.
Also, be aware of the statement and payment due dates – if you make your purchases at the right time, you’ll benefit from longer payment terms.
(8) Nurture your clients
Finally, ensure you look after your existing customers. They are the lifeblood of your business and can bring you both repeat business and referrals. Try to increase their spend with you; this is quicker, easier and more cost effective than searching for new business and will increase turnover, profit and cash flow. Happy, loyal clients who reliably pay every invoice on time make it a lot easier to make cash flow projections too.
You can read the orginal article on Real Business
Date Issued 04 April 2016.
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