Cashflow toolkit

In brief

• What is cashflow?
• The perils of cashflow management
• Solving your cashflow problems
• How the bank can help
• What to do next

We’ve all heard the phrase ”cash is king” and with good reason. Good cashflow management is arguably the single most important skill any business owner must learn, and the sooner the better.

So what exactly do we mean by the term ”cashflow”? Essentially, it sums up the pattern of cash paid out (expenditure) and cash coming into the business (income) over a given accounting period. For instance, if you sell products to the value of £100,000 in a month and have outgoings of £40,000 over that period you have a positive cashflow of £60,000.

The aim of any business is to be, and remain, cashflow positive. However, life’s not always that simple. Early stage businesses often find that they ”burn cash” as they establish themselves in a market.

Fast growing companies can be guilty of a false sense of security. Erroneously believing a healthy order book or pipeline of work is sufficient, these companies forget that if you can’t pay suppliers, rent, salary and amenities until the cash comes in then you have an enormous problem on your hands.

There’s only so long a business can remain ”cashflow negative”. A business that does so until cash reserves run out will inevitably end up insolvent.

A task that business owners frequently neglect to do is to account for the less obvious forms of expenditure.

They mistakenly simplify the equation of money made from the "ticket" price of a product or service and the corresponding cost of the elements that go towards putting it together.

For instance, a dress sold for £200, with materials costing £50, has not made £150 in profit.

It may have taken a dressmaker two full days at a charge of £100 a day – already a loss of £50, and that’s without taking into account the expenditure of using commercial premises, lighting, heating, equipment, marketing and the sales people employed to sell the garment in the first place.

Business owners must learn to factor everything into their pricing – no matter how small and seemingly insignificant. To fail to do so is to risk poor cashflow management.

What then constitutes good cashflow management? Or, more specifically, how can you get the cash in, follow up debts and employ an array of financial products to keep your business cashflow positive?

1. Increase Sales
Businesses attempting to trade their way out of a cashflow problem may discover that new customer acquisition carries a heavy price in terms of marketing. Raising brand awareness through promoting a product or service is all well and good when a business already has a strong cashflow. More efficient ways of generating fresh revenues or cutting costs include:

• Going back to existing customers. Good customer retention means repeat business. If the product or service your customers have already bought is not the type to offer recurring revenues, then ask yourself whether or not you have related products or services that you could cross- or up-sell.
• Referrals are a variation on repeat business. If you have a happy customer, ask for referrals or offer an incentive for introducing new business, such as a discount scheme. In the same way, affiliate marketing encourages others to do the work of ”selling” your wares for you, content in the knowledge that they will receive a cut for every successful transaction.
• Discounts are another way to boost interest or sell hard-to-shift stock if your business is product-based. It’s not a habit you want to get into outside the accepted clearance sales patterns in your industry. However, when priced carefully, you can use the increased interest in your discounted product to cross-sell, up-sell, bundle or increase appetite for full-priced items.

2. Follow up monies owed
Bad debt usually has an adverse effect on businesses. A study by the Forum of Private Business in 2008 found that nine out of ten small firms were not being paid within contractually-agreed time periods and 72% said it was having a ”serious” or ”very serious” affect on their business.

Before taking on a major client ensure you have checked their credit history.

Look at their published accounts, including levels of bank debt and loans, at Companies House.

Check out the owner’s finances, where possible. And speak to their other suppliers.

If you're satisfied, request an official purchase order and ask that they agree to your payment terms and conditions and provide prompt and fulsome payment.

Set a credit limit, a figure you are comfortable for a company to owe the business at any one time, such as 20% of working capital.

Certain banks offer credit-monitoring facilities to their business customers.

If these measures haven’t been enough in the past, then there are numerous techniques that proactive companies employ in order to ensure they receive payment on time:

• If your business offering is provided on a project basis, request a percentage as an advance payment
• Offer discounts for early or upfront payment
• Request frequent, regular payments in order to keep the debt from escalating
• Invoice as early as possible following completion of the job
• Automate reminders to chase payment – issue the first by phone and keep it polite and friendly
• Charge interest for late payment. It’s a statutory right, but all too often avoided for fear of losing a contract
• Consider employing a factoring firm to chase debts on your behalf
• Request an overdraft from your bank in order to provide some leeway while awaiting payment.

Bridging finance to keep your business buoyant while you await payment comes in various forms and is typically available from your bank. Options include:

• Overdraft An additional facility for a business current account, which equates to a safety net while awaiting payment. Overdrafts are agreed for a set period, such as a year, and interest is calculated daily
• Factoring Ideal for small businesses with no accounts department. An invoice finance provider lends the business in question a percentage of the value of an invoice raised upfront – and then chases the debt in return for an admin charge and a small percentage of the invoice. These arrangements are only appropriate for ”business to business” (or ”B2B”) companies that raise invoices for recruitment firms, wholesalers, manufacturers and franchises, and so on
• Invoice discounting The next level up from factoring. Invoice discounters also provide a percentage of an invoice raised upfront. In this case, however, companies using such facilities are required to chase their own debts. This allows users to retain control of their sales ledger. The perception that only weaker companies use factoring is no longer as prevalent
• Asset-based lending Used alongside an invoice-discounting facility, businesses can raise cash against the value of stock, machinery, property, vehicles and, in some cases, brand.