The six basic things you must be doing to manage your cashflow

Posted: 10th November 2014

Cashflow is the life blood of a business.  If the business is bleeding cash then the outcome is inevitable. One of the first lessons an owner-manager needs to learn is how to monitor and manage cash.  

1) Negotiate credit terms when you negotiate your sales price.

Begin to think of your cashflow as the most valuable part of your business. Every time you grant credit to your customers it is costing you cashflow (as well as real money). Every time you negotiate credit with your suppliers it improves your cashflow (and saves you money).

Credit terms should be negotiated early on, in your initial sales meetings.

Make it your goal to be stingy when granting credit to your customers and pushy when negotiating credit with your suppliers. For new customers ask them to pay on invoice, or in 14 days, before you go to 30 days – that’s from invoice date NOT end of month following.

To help customers pay quickly offer them discounts for early settlement and consider penalties for late payment. You are legally entitled to do this:

2) Put together realistic cashflows (and review them).

Even if it’s just for the next quarter put together a cashflow detailing your future cash requirements.

Review this every month (every week if cash is tight) and look at your actual position against your budgeted position. If it’s way out then find out why. Are payments slowing? Do you need to step up credit control? Are you making your margins on sales? Are you buying the right stock? Are costs under control?

There are so many variables and so many ways for cash to move out of the business, you must be vigilant. Even if your cash position is healthy there is no room to be complacent in business.

If you need a cashflow template then this Excel based template might help:  Cash Flow Template

3) Don’t pay lip service to credit control.

A good credit controller is worth their weight in gold and, more than anything else, good credit control is about consistency. Most small companies allocate too little resource to proper credit control, often it will be the owner-manager who will chase for payment - probably the most unsuitable and least qualified person in the business to be doing that role. This means that credit control is sporadic and often panicky – e.g. the customer who hasn’t been contacted for 60 days gets a call threatening legal action! Good credit control works to a system of statements, letters, telephone calls and, only if very necessary, legal action. Implement a system of consistent and regular contact with the customer.

Most people are actually happy to pay you, it's just when rather than if. You need to make sure you are first on list.

4) Please, please, please credit check your customers.

This is a must. Although credit checking agencies work on historic information, which may be a year or more out of date, they will give you a feel for your customer’s financial strength and will list County Court Judgements (CCJs) - a real and immediate indicator of financial problems.

Remember things change quickly with existing as well as new customers -  if you can get regular updates from a credit agency on your customers then this will provide you with valuable information.

If you do get negative information then act on it – chase harder, put the company on stop, take legal action if necessary.

5) Consider protection against bad debts.

This is the type of response I get when I bring up credit insurance:

‘I don’t take out credit insurance because I don’t get many bad debts’

‘I don’t take out credit insurance because I’ve been dealing with my customers for a long time’

‘I don’t take out credit insurance because the credit insurance costs more than my bad debts last year’

The only reason for not taking out credit insurance is if you are dealing with the Government. If banks can fail then your customers can fail. Credit insurance does not exist to pay for itself, it is there to protect one of the most valuable assets in your business – your debtors.

It's an unfortunate fact of life that businesses will fail. If it is your customer make sure that you are covered.

6) Keep your lender informed of your progress (before they have to ask).

A disappointingly small number of our clients are proactive about keeping us informed of their progress. Those that do tend to gain respect and credibility quickly, so if it comes to increasing a limit or arranging an overpayment their applications are 90% there.

Send your lender monthly management accounts with a brief commentary on performance. Inform them well in advance about required changes or increases in your facility.

The first law in business is survival.  Proper cashflow management is vital in keeping a business healthy and robust.   Bear in mind these basic rules and you will be well on the way to a long and lucrative business life. 

Please contact us here and to discuss in more detail about how we can help. You may also find our blog about How to Choose A Factoring Company  of interest.

Mark Byrne,

Managing Director, Macla Money