21 ways to improve your cash flow
3. Establish debt chasing procedures
Credit control and debt recovery are vital pillars of good cash flow management. PricewaterhouseCoopers (PwC) research indicates that nearly one in five companies regard current debt levels as the ‘biggest threat’ to survival. Julian Roberts, director of PwC’s receivables management group, urges, ‘It’s a good idea to establish a structure to the debt chasing procedure.’ He recommends that follow-up calls take place after a certain interval, invoices are re-issued a limited number of times and if that fails, a more serious course of action kicks in. The longer a debt remains unpaid the harder it becomes to collect. ‘If your customers are on 30-day payment terms, someone has to call on day 31 and ask where the payment is if it hasn’t arrived. If you don’t do that, you immediately weaken your position,’ says Jeff Macklin, co-author of Finance on a Beermat and MD of FDUK, providers of part-time finance directors to ambitious companies.
Ultimately, debt chasing is about maintaining a delicate balance in client relationships – keeping them happy while getting your money. Established in 1918, Lantex Manufacturing has had 88 years to get it right. ‘We maintain in-house credit control and it works well because we’re a small company with a good rapport with our clientele,’ says Margaret Sangster, FD at the Lancashire-based textile manufacturing firm.
4. Incentivise management to take responsibility for cash flow
Michael Wilmshurst became chief executive of Nationwide Accident Repair in 2002 after a hostile takeover and soon became aware that credit control was not part of company culture, so he began incentivising management to take responsibility. ‘Credit management needs to be part of managers’ jobs, not just something to blame on the finance department,’ he says. ‘A £1,000 debt that passed 90 days overdue would cost the manager £100. Suddenly all the managers found a way to get their money.’
The Listening Company has taken this idea a stage further. ‘Our project managers actually raise the invoices to send to clients,’ says Upton. ‘The financial controller checks that the details agree with the contract terms, but the responsibility for that invoice lies with the project manager. It’s part of how we assess their performance. As you can imagine, we have very little bad debt on our books.’
5. Understand your customers and the nature of their payment cycles
Many of your clients will have set dates in the month when they pay invoices, so it’s a good idea to incorporate that into your credit control system. ‘If you miss a customer’s cheque run you might have to wait another month and that directly affects your cash flow,’ says Upton. ‘Some customers we invoice weekly, some monthly, and that flexibility means we’re much more likely to receive payments on time.’
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If cash is king, ABL is its queen
Managing cash flow effectively should be at the heart of every company’s culture. It’s the biggest single challenge for growing firms, but what many forget is that everyone in the business needs to prioritise cash flow considerations – not just down to the finance team.
A company may experience cash flow pressure for many different reasons – even profitable companies can suffer - and understanding why is crucial. The process that takes the business from purchase of inventory through to the collection of accounts receivables is a long and detailed one, and is fraught with potential hiccups that can affect cash flow.
Understanding the issues, what they are and how to manage them is key: managing debtor collections, strong credit control and focusing on profitable sales will all contribute tremendously – as will the correct funding structure and an experienced funding partner that understands your business and will work with you to achieve success.
Asset-based lending (ABL) can accelerate a company’s cash flow cycle as part of innovative and flexible funding packages. ABL is tied to the value of unencumbered assets in a business and is particularly useful for assisting a company during a growth phase of its development because it grows in line with the increasing value of the assets available for funding.
By definition, ABL works particularly well for businesses that offer extended credit terms to debtors, or those that experience seasonal fluctuations in trade or challenging trading cycles. So if you want to ensure cash flow rules supreme in your business, try introducing it to ABL. It’s a perfect match.
Mike Harrison is regional sales director with Enterprise Finance Europe (EFE),
the asset-based lender to companies with turnover between £2 million and £100 million, as part of the Bank of Ireland Group.
Contact him at mike.harrison@boiuk.com or visit www.efeeurope.com