…without recourse to external finance
A healthy business cash flow is critical to the survival of your business. But establishing the viability of your business is beyond the scope of this article. If you’re not sure about it then by all means get in touch: email@example.com
Second, no article can take the place of proper professional advice. If you have concerns that your business may not have a future then you need to take advice from a qualified professional. The sooner you do this the better.
And finally, this article focuses on steps you can take NOW. Steps that will immediately improve your cash flow without recourse to external funding. But bear in mind that external funding may be, in fact, the best solution for your business.
So let’s get to it!
As you read through the following paragraphs, establish the facts for your business. Don’t assume, for example, that your customers are being invoiced promptly. This might be your expectation and you might have issued instructions to that effect. But you need to see the evidence that it is happening for yourself. This principle applies to each of these steps.
1. Credit Check Your Customers
Signing up with a reputable credit referencing agency could be the best money you ever spend. Especially if you’ve experienced bad debts in the past. Or if you operate in an industry where bad debts are an occupational hazard. Of course, you then have to follow their guidelines.
I have lost count of the number of ‘difficult’ conversations I have had with clients over this. “But it’s a huge contract”. “We really need the business”. “We’ve built in a really good margin”. I’ve heard them all.
Believe me, a huge contract that doesn’t pay is just a huge hole in your bank account. You really don’t need any business unless you can be certain of payment and as for that “really good margin”? You’ll never get to enjoy it if the customer goes bust first.
In these situations you have 4 options:
- Decline the business,
- Insist on payment upfront in full,
- Insist on stage payments in advance. This will ensure your costs are always covered before you’ve incurred them, or
- Allow credit but only to the recommended level.
The last 2 options both need monitoring you’re not getting over-exposed to credit risk. But, believe me, the quickest way to go out of business is to take on too many customers who never pay you.
2. Invoice Promptly
One of the quickest things you can do to immediately improve your cash flow is to invoice your customers promptly.
Many struggling small businesses are just ‘too busy’ to invoice their customers.
But, if you’re short of cash you need your customers to pay you.
And it should be obvious that they’re not going to do that until they’ve got an invoice from you.
3. Make Paying Easy
Make as many payment options available to your customers as possible.
If you can, accept cash, cheques, credit and debit cards, electronic bank transfers, and PayPal. Some of these will incur costs. And depending on your business some may not be appropriate.
But don’t make it more difficult than necessary for your customers to get their remittances to you.
And if your business delivers large contracts over time, negotiate staged payments.
Not only will this ease your cash flow. But your customer may well prefer this to receiving a large invoice for the complete job at the end of the project.
4. Clarify Your Payment Terms
Make your payment terms clear to your customers. Do this in your terms of business. And on the face of your invoice.
Otherwise, expect them to take as long as they like to come up with the cash.
5. Collect on Your Debts
Get hold of an ‘aged debtors’ listing. This is a key report that will tell you who owes you, how much they owe you, and how long the debt has been outstanding. Even the most basic accounting package can provide this at the push of a button. You can also do this calculation to give you an estimate of the average time your invoices are outstanding:
𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡𝑜𝑟𝑠 ÷ 𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑃𝑒𝑟𝑖𝑜𝑑 × 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐷𝑎𝑦𝑠 𝑖𝑛 𝑡ℎ𝑒 𝑃𝑒𝑟𝑖𝑜𝑑
So, if you’re looking at your accounts you might see Trade Debtors on the balance sheet totaling £75,000. If you had credit sales for the year of £650,000, the equation becomes:
75,000 ÷ 650,000 × 365 = 42.1
Accountants call this your ‘debtor days’ or average collection period. In this example, unless you allow your customers 42 days or more to pay then you’ve got a problem. If you expect payment on presentation of the invoice or within 7 days then you’ve got a really serious problem.
The action step here is to make sure that you (or someone you trust) always know who owes you what. And once an invoice is overdue, you need to pick up the phone and ask for your money!
You really do need to do this. Many businesses will only ever pay after someone has chased them a couple of times as a matter of principle.
Is that wrong? You bet it is, but taking the moral high ground isn’t going to get you paid any time soon so you need to pick up the phone.
And make sure you have a process to escalate unpaid invoices. This should culminate in court action to recover the monies owed. Never feel bad about this. You’ve supplied the goods or services at an agreed price and on agreed terms.
This is your money and you are entitled to it so go get it!
6. Manage Stock Proactively
I worked with a client recently in an industry where stock is delivered in almost real-time. The business receives up to 3 deliveries a day. Orders placed in the morning can be delivered that afternoon or, at the very latest, the following morning. So my expectation was that stock levels would be minimal.
I was more than surprised to find that average stock levels across the business equated to about 6 weeks’ worth of sales. This was a business with revenues of £22m and a gross margin of around 30%. So that amounted to close to £2m of cash tied up in stock sitting on the shelves.
No business wants to cut stock levels to the bare minimum. And some cushion to ensure you can weather short-term supply issues is always sensible.
But many businesses could alleviate their cash flow problems by taking a more proactive approach to this issue.
And don’t forget that excess stock brings other risks as well. Obsolescence, theft, and are damage among them. All of which points to the importance of minimising stock levels within sensible tolerances.
7. Sell Surplus Assets
Do you have assets lying around your business that you no longer use? Old computers, machinery, and other items that you have no use for? Have you identified some obsolescent or damaged stock that you need to write off? Don’t assume that just because something is of no use to you any longer that it’s of no value at all.
I have a client who has a side-line servicing document scanners (and even fiche-readers). Many of these machines are decades out of date as technology has moved on. But he regularly trawls eBay to pick up old machines for not much more than scrap value to cannibalise for parts. In some cases, he is able to recondition them and sell them to his customers.
You might not solve all your cash problems selling off your old kit and obsolescent stock. But it’s always worth seeing what you can get for them. When you’re facing a cash hole the old adage is very true: every penny counts!
8. Don’t Pay Until You Have To
This is the opposite side of number 5 above; make sure you get paid on time.
I’m not suggesting that you should wait until you’re receiving legal letters before you pay your suppliers. But don’t go to the opposite extreme and pay every invoice as soon as it lands on your desk.
Actually, there is a lot of sense in being a bit strategic about this (to the extent you can afford to). You should ensure that your key suppliers are paid promptly and even a little bit early.
But for the rest, take your time. You have agreed terms with your suppliers so pay at the end of the agreed period and not before.
You can also do a calculation for creditors, like the one you did for debtors, to establish your average payment period:
𝑇𝑟𝑎𝑑𝑒 𝐶𝑟𝑒𝑑𝑖𝑡𝑜𝑟𝑠 ÷ 𝐶𝑟𝑒𝑑𝑖𝑡 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 𝑖𝑛 𝑡ℎ𝑒 𝑃𝑒𝑟𝑖𝑜𝑑 × 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑖𝑛 𝑡ℎ𝑒 𝑝𝑒𝑟𝑖𝑜𝑑
A useful source of working capital can be to keep this number larger than your average collection period. Meaning that, on average, you take slightly longer to pay your suppliers than your customers take to pay you.
9. Raise Your Prices
Ok, so this one is going to be a bit controversial. But often the quickest way to get more cash into your business is to raise your prices. Only you will know if you can get away with it but even if you think you can’t, it’s worth thinking about.
Look at it another way; when did you last review your prices? Inflation across the western world is pretty low at the moment. But even at 2% per annum, you can assume that your costs have increased by about 10% over the last 5 years.
And if your revenue hasn’t kept pace with this then your gross and net margins have both eroded by a similar amount. In other words, a business with a gross margin of 30% 5 years ago will have seen that decline to something like 23% today. And this now has to fund overheads 10% higher…
It’s not a pretty picture so give this one some thought. Depending on the size of your business it could be worth a lot of money to you.
10. Cut Your Spending
If raising prices is the quickest way to get more cash into your business then the most certain way is to stop spending the cash you’ve got!
Obviously, there is a limit to the control you have over your revenue line. Ultimately it is driven by customers wanting to do business with you on an ongoing basis.
But you have a lot more control over the money that you spend as a business. It’s a fact that in the good times businesses get ‘fat’. The money’s rolling in and no one worries too much about how it’s being spent. Then times get a bit harder. But by now the organisation has got used to working with an established level of overhead cost.
I’ve worked with a number of businesses where we have been able to cut the cost base by between 10% and 20%. without causing the business any problems.
I’m not suggesting that these decisions are always easy. Or that they don’t involve some pain for some people. But finding the courage to take some difficult decisions has to be preferable to the alternatives. Especially if it results in the business being able to continue to provide employment for the majority of its employees
This is not intended to be a treatise on cost management but here are some ideas to get you started:
- Start with cost of sales (where this is applicable). Your gross margin pays your overheads (which are fixed). So any improvement in gross margin drops straight through to the bottom line. And will improve your cash position at the same time.
- Take a look at your largest suppliers. When was the last time your large supplier contracts were retendered?
- How productive is your workforce?
- How efficient is your Head Office?
It’s difficult to review your business’ expenditure objectively. But there are a number of approaches that can help:
- Ask yourself how each expense affects the customer. If you didn’t incur this cost, would customer service levels, or the user experience, suffer?
- If the cost is essential for you to deliver your product or service, could you provide this service another way? Could it be outsourced for example?
- Of course, many overhead costs don’t directly impact the customer. But they’re still required for legal, regulatory or other compliance purposes. Finance, HR and Legal costs all fall into this category. So think about whether you need to have these functions in-house. Or whether an outsourced solution might be more cost effective. Established outsourcing partners will have the benefits of scale on their side. And will enable you to use their services far more flexibly than a team of full-time employees. This could lead to substantial cost savings.
So there you have it! 10 practical, immediately actionable steps that you can take today to start to improve your business’s cash position:
- Make sure your credit customers are ‘good for it’.
- Invoice promptly.
- Make it easy for your customers to pay you.
- Make your payment terms explicit.
- Chase outstanding monies and make sure you get paid on time.
- Manage stock/inventory levels proactively.
- Sell off surplus assets/stock.
- Don’t pay your suppliers until you have to.
- Consider raising your prices.
- Stop spending the money you’ve got.
Work down this list and pick each item off in turn. Each item will have an impact on your cash flow. The cumulative impact of all of them together could be significant. If you would like to discuss any of the matters raised in this report please drop me a line.