Unfortunately during 2009 more businesses are likely to go to the wall. As they do,…
Over the last twelve months, I have been asked one question more than any other;
“how do I improve my cashflow?”
Lack of cash is the number one killer of small businesses and the statement “turnover is vanity, profit is sanity, but cash is reality,” has never been more true than it is today. That’s because in a tough economy, customers will pay you more slowly and suppliers will want you to pay them more quickly.
The following 6 step plan contains some ideas and strategies that we have helped our clients put in place, which have seen them achieve massively improved cash flow. By using these ideas, you will be able to manage the tough times and when the good times return, you’ll have all the checks and controls in place to be one step ahead. Our clients have found this invaluable, and I believe you will too.
1. Know your customer
It’s very easy to do some work for a new customer, only to find out that they can’t afford to pay you or have been bad payers to many other suppliers in the past. Of course, most people only find out that a customer is a bad payer when it’s much too late.
To help prevent that happening to you, make sure you credit check your customers before offering credit terms to them. There are many online agents that will do this for you, for a small fee. Experian and Equifax are probably the best two known agencies in the UK, but in the B2B market, you could also use agencies such as Creditsafe or Busibody (which is actually part of Experian).
Similarly, you need to review your existing customer base. Does it contain those “won’t pay/ can’t pay” customers? If it does, get rid of them now! They have this amazing ability to drain your time and effort, and you know that it will be so much hard work to get them to pay even a small amount of the bill. Instead, spend your time and energy on the better customers, who are delighted to get extra help and will gladly pay for it.
2. Review your terms of business
I’ll bet that for the majority of businesses, their terms of business haven’t changed since the day they started. To go even further, I’ll bet that the way they set out their terms is identical to everyone else in their industry, and it’s the way they were taught before going it alone.
Typically, this approach will be:
Do all the work.
Hand it over to the customer.
Then just wait to get paid….and wait…..and wait. What a nightmare!
Instead of carrying all the risk and cost throughout the project, ask for a proportion of the fee upfront, or at the very least, on project work, ask for payments at clearly defined milestones in the project. Then, make it clear to the customer that you won’t continue to the next stage, until the previous bill is settled. At the very worst, if you use this approach, you’ll only be one “stage” down should the customer default, rather than lose the whole project revenue.
Monthly payment plans can also help ease those cash flow worries, if you work with clients on a regular basis. The majority of our clients at Accountancy Extra, pay us for our services by monthly standing order. The customer has the benefit of knowing how much they need to budget each month, similarly to budgeting for a utility bill and we don’t need to regularly chase outstanding debt. A win, win scenario!
Alternatively, if you can’t apply milestone or monthly payments to your customers, what about offering them early settlement discounts? The thought of getting a small percentage off the bill for paying early will be attractive to some customers who want to keep their costs down. Conversely, you should consider adding statutory interest to invoices that are paid late – and state it clearly in your terms of business that that is what you are doing.
3. Manage stock levels carefully
Money invested on stock sat on shelves is dead money! Ok, you need to keep stock in for when a customer calls or visits, but do you really need maximum quantities of all your lines?
Avoiding overstocking and having all that cash tied up, (whilst ensuring you have enough to meet customer demand), isn’t easy. However, by using a recognised stock ordering technique, you can easily achieve a happy balance. Consider using Just in Time (JIT), Economic Order Quantity (EOQ) or batch control methods to minimise the costs of holding stock.
4. Relentless and pro active credit control
It’s a typical scene: You complete some work and raise an invoice to the customer, stating that your payment terms are 30 days from issue. After 30 days, you haven’t received payment, but you delay chasing for another few days, just to be sure that the cheque is not in the postal system somewhere. When the cheque hasn’t arrived after those few days, you call the customer and typically get one of two responses, either “we didn’t receive it” or “ there’s a problem with the invoice”.
At that point, you reissue the invoice and wait a further 30 days…..sound familiar?
Instead, three days after issuing the invoice, call the customer and ask if they’ve received it and are there any problems. These questions require yes or no answers. On the assumption that both are answered in your favour, then you can finally ask “so we can expect payment on XYZ date?”.
Remind them, perhaps via e mail, 5 days before the invoice is due and then start chasing immediately after it’s due. At this point, you’ve just removed the most commonly used excuses for not paying, so at least you’ll get to the root of the problem and not just be the victim of “dallying” tactics. Remind them that you are adding statutory interest to the invoice.
A lot of our business customers were unsure about how to approach credit control. To help with this, we put together a helpsheet of various letter templates, telephone scripts. Feel free to download it and use it in your business. You may wish to adjust some of the timings stated on the helpsheet to fit in more with your business and it’s credit terms.
5. Make it easy for them to pay
Or looking at it another way, make it hard for them not to pay! Why not consider extending your range of payment options. Facilities to take credit card payments can be added to websites inexpensively or you may wish to include your bank details on invoices to allow electronic payment transfers to be used.
6. Keep your cash flow forecast up to date
Whether you need to manage it daily, weekly or monthly (depending upon your billing cycle), do make sure that you keep your cashflow forecast bang up to date. Keep the forecast on a simple spreadsheet, listing expected cash in and then all the outgoings that you’ll need to make over the next 12 months.
Be realistic, customers will always try and pay later than you anticipate, so don’t build unrealistic time-scales in. By extending the forecast over 12 months, you can quickly identify any problem months and prepare a plan of how you’ll tackle any predicted shortfalls.
I hope you found these cash flow tips useful. If you did, please share them with your friends and contacts. If you have any questions, drop me a line here or call me on 01422 365981.