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Top Tips on How to Handle Your Cash Flow

By FA Simms

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Simply put, a business needs cash in order to stay in business. Healthy books and profit margins are meaningless if you run out of cash and therefore can’t pay your suppliers or employees on time.

So how can you best handle your cash flow? Here are a few top tips…

1. Implement good credit management

Being on top of your finances is paramount; you need to know what’s coming in and going out at all times.

Produce and regularly update a cash flow forecast

  • Review this routinely so that any variance is flagged up as quickly as possible
  • Be aware of any customers experiencing financial difficulties that might affect payments to you
  • At the earliest sign of any problems speak to your accountant or financial advisor
  • Equally, talk to your supplier as soon as you know you’re unable to pay them on time to see if you can come to an arrangement for the payment

2. Formally agree payment terms

Your cash flow will be placed under real pressure if payment fails to arrive when you’re expecting it for goods/services you’ve provided.

  • Don’t make assumptions: agree terms of payment (TOP) with your customers and suppliers in advance – and in writing
  • Try to negotiate longer terms with your suppliers than those agreed with your customers
  • Run credit checks on all new customers

3. Invoice promptly and correctly

Invoicing is a vital first step towards healthy cash flow. It might seem obvious but if you don’t raise an invoice, you can’t expect to get paid.

  • Raise an invoice immediately after supplying goods or a service
  • Get invoices right first time by including all the required information; reissuing invoices not only wastes admin time but also defers the payment due date
  • If you’re VAT registered, make sure your invoices are fully compliant with HMRC
  • Encourage customers to pay electronically to avoid waiting for a cheque in the post
  • Consider offering discounts to customers who pay their bills promptly
  • Use an effective accounting system or dedicated accounting software
  • Keep all documentation relating to any payment disputes – just in case!

4. Chase payment

A sale is only complete once you’re paid in full.

  • If the invoice is large, ring before it’s due to check it’s been received and there are no queries
  • If the due date has passed, make immediate contact; be assertive about your expectations and the consequences of non-payment
  • If a customer frequently pays late, decide whether to continue supplying them; it may be better to lose an order – or even the customer – than suffer a bad debt
  • Be polite, professional and persistent

5. Manage your outgoings

A key part of good cash flow management is minimising or delaying cash going out of the business.

  • Examine costs carefully to find opportunities to reduce them
  • Make the most of creditors’ TOP: if payment is due in 30 days, don’t pay it early
  • Transfer electronically to defer payment as long as possible without being late.

6. Consider finance & factoring

If you have a cash shortfall, finance and invoice factoring may offer your business the space it needs to recover. This involves receiving partial payment (around 85%) today against invoices you may otherwise not be able to collect on for weeks or months. But it removes the hassle of chasing for payment and can keep your business operating without the need to borrow.

Published November 2013