21 ways to improve your cash flow
6. Invoice accurately
Research from PwC found that around 85 per cent of the reasons given for non-payment by business customers relate to invoice queries or poor administration.
When Michael Wilmshurst took over Nationwide Accident Repair, the amount of debt reaching 120 days since the due date totalled £1.6 million. Now he’s reduced that figure to £115,000 and he says it’s vital to get the basics right, such as invoicing the right amount and sending it to the right place. ‘You wouldn’t believe how many times invoices are sent to the wrong address,’ he exclaims.
A golden rule is to never send out invoices with the intention of making corrections afterwards. ‘If your invoices aren’t accurate, you might only discover this when you chase for payment, which could delay it for weeks, even months,’ says The Listening Company’s Upton.
‘Importantly, getting it right first time also conveys a sense of professionalism, as there’s nothing more embarrassing than a customer having to phone you to point out you’ve got their invoice wrong.’
7. Have a dedicated credit controller
PwC’s Roberts believes it’s vital to have a good credit controller. ‘You need to have people who are consistently involved in chasing debt, rather than just fitting it in on a Saturday morning as a number of business owners do.’ Many owners get involved in chasing debt from customers with whom they have a relationship, but that’s not always appropriate. Sometimes it’s better to have a clear division of responsibility and not wear two hats. ‘By all means call the client to gently warn them the debt recovery procedure has kicked in and see if you can prevent it going further,’ says Jeff Macklin from FDUK, ‘but leave the hardcore debt collection to a credit control rottweiler you hire specifically for the job.’
8. Use a third party to collect your debts
If all else fails and your cash flow is suffering as a result of large quantities of cash tied up as unpaid debt on your books, consider outsourcing the work to a collection agency. Although they have a mixed reputation, figures from the Credit Services Association (CSA) trade body indicate that its members recover up to £5 billion each year. ‘Don’t pick a collection agency randomly from the Yellow Pages. Only use one you know yourself or one recommended to you,’ advises Macklin. A collection agency is advisable if you have a large number of customers who represent a small value of debt or are dealing across borders, as they will be aware of cultural differences and can often work outside normal office hours.
9. Only deal with customers who have a good credit history
It’s a good idea to credit check customers in advance and continue to monitor their payment practices throughout your business relationship. One way is to purchase status reports from credit agencies. These include full customer details and financial results along with the payment experience of other suppliers, county court judgments and a recommended credit rating. Ultimately, PwC’s Roberts urges businesses not to throw good money after bad. ‘If they’re a good purchaser but a bad payer you have to think about whether you want to continue dealing with them.’
10. Make your terms and conditions clear
If an agreement to terms and conditions forms part of the grounds on which any deal is struck, it avoids misunderstandings and strengthens your ability to collect any outstanding amount later on. Jeff Macklin of FDUK is adamant that the issue of payment has to be at the heart of sale negotiations: ‘Make it clear that you’re not just
selling something, you’re also agreeing with the buyer what and when he’s going to pay for it.’
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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