One of the single biggest pain points for small businesses, and a major driver of stress, is managing cash flow and chasing bad debts. Even the biggest businesses fall foul of cash flow difficulties – take the construction and support business Carillion for example which, by the end, was having a daily cash call just to understand how much money it had left to continue day-to-day operations.
Cash flow problems can arise due to a number of different reasons from inaccurate invoices, through to clients’ unwillingness or inability to pay, while even profitable businesses can get into cash flow difficulties by overtrading. A common problem for start-ups, overtrading is where sales grow too fast and too much working capital is tied up in meeting the business’s day to day expenses – such as supplier costs, salaries and office expenses – before work is invoiced and payment received.
So, how can you stop your business from suffering a cash flow crisis? Here are my top tips:
1. More in, less out
The first place to start to get more cash coming in is by reviewing your pricing and/or reviewing regular expenditures such as software subscriptions or office expenses. Improve your working capital by improving your margin overall for the long-term.
2. Know what’s coming in
Automated cash flow systems can also help your business better predict its future bank balance to help you plan better and deal with potential future cash flow issues before they become a crisis.
3. Invoice promptly
Make sure you invoice as soon as the job is complete. For bigger jobs, try to negotiate 50% payment at the start of the job, and the rest on completion.
4. Make sure your invoice is correct
Roughly 25% of invoices can’t be paid because they are wrong – the wrong purchase order number, wrong address, wrong person or wrong amount. Getting the basics right can iron out many reasons for delay.
5. Make it easier to pay
Use technology to remove barriers to payment. For example, include a payment link on your invoice which allows a customer to pay by debit or credit card. These integrated payment links are typically embedded in cloud accounting software like Xero or Sage – use them! The arrival of Open Banking will also help make it easier for your clients to pay.
6. Have a prompt escalation process
Streamline your credit control process through automated email reminders and scheduled telephone calls. If an invoice payment is more than a week late, make sure you escalate the process quickly – call someone more senior in the accounts team of your client and get a commitment to pay. I once went to the reception area of a client and waited until they gave me a cheque. Don’t be the ‘slowest gazelle’ – the passive supplier that your client knows will wait to be paid.
7. Deal effectively with the really bad debts
If you do find a client is still unwilling to pay, an effective option is to download and complete the application required to take them to a small claims court. Complete the paperwork then scan it and attach it in an email to your client explaining your intention to progress. Most will settle their debts but be prepared to follow through if you need to.
8. Negotiate better terms
Avoid invoicing terms above 30 days. If a client is insisting worse terms on payment or price try negotiating something in return such as a client testimonial (provided of course they are happy with your work), or a business introduction to five of the client’s contacts. Also don’t feel you have to pay suppliers immediately – if you have been extended credit terms to 30 days use it.
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