How to improve your company's cash flow - and avoid going bust

Soaring revenues are all well and good but if you can't pay the bills you'll soon be in trouble.

by Jack Torrance
Last Updated: 16 Mar 2017

As everyone is so fond of saying, most new businesses fail after a year or two. Sometimes that’s because products or services weren’t good enough for the market. Occasionally it will be because of the personal failings of the founder. But often the biggest threat is a problem with the company’s cash flow – when there’s too much money going out and not enough coming in.

Cash flow problems can sink even the most promising of companies. In fact it’s start-ups that are growing quickly that can face the greatest risk as they increase spending in line with their on-paper revenues, only to find themselves with a tonne of bills to pay but a long wait before receiving any payment from clients.

‘No matter how much imcome you have coming in, if your cash is not managed sufficiently and dries up then that will cause the business to fail,’ says Graham Robson, an entrepreneur and start-up advisor at Business Doctors. So how can your business avoid falling victim to a cash crisis?

Focus on margins, not just revenues

As the saying goes, ‘revenue is vanity, profit is sanity.’ It might be tempting to drop your margins and go for growth but the less profit you’re making on each sale, the more precarious your cash flow is likely to be. Complacency about margins is ‘a real silent killer – by the time you realise, it’s too late’ says Jerry Brand, who’s started and sold several catering businesses and now runs The Brand Foundation, a charity that helps small businesses get off the ground. Before you say yes to that big contract, make sure you can afford to deliver on it – especially if you expect a long wait before getting paid.

Forecasting

You should plan all of your expected spending and revenues to make sure you will have the cash available when you need it. 'I had a client who was hit by a VAT bill for £60,000, he didn't even know it was coming,’ says Robson. ‘So he went from having plenty of cash in the bank and being able to pay his employees to suddenly having a big hole. Cash flow forecasting is vital for any business to ensure they plan ahead.’

He suggests it's possible for entrepreneurs with a very small business to do this without financial training, but that companies approaching £1m in annual revenues need a proper accountant on board for these sorts of tasks. '[They should] invest not only in backward-looking P&L statements and balance sheet, but also forward-looking forecasts on P&L and cash flow.'

Outsource

Be careful not to tie up too much of your budget in wages and other fixed costs. ‘SME owners should be quite clear about what it is they provide as their core business - what value they specifically provide to a client,’ says Robson. ‘Anything that is not core to that should be considered for outsourcing.’

That does mean ceding some control, and it might prove more expensive than doing things in house, but crucially it is much more flexible. When the chips are down it’s a lot easier to cease trading with a couple of suppliers than to ditch half of your workforce. For the same reason it could be worth leasing equipment that you need instead of buying everything outright.

Negotiate payment terms upfront

If you’re selling B2B, you need to be clear up front about how and when you will be paid (many large companies have standard payment terms, but it’s always worth trying to negotiate). Check if you need a purchase order (PO) number and try to get one before you do the work. If you can talk them into paying a deposit or half the price up-front then all the better.

Chasing payment

Late payment of invoices remains an endemic problem for small businesses in the UK, especially those working with big clients. According to the Federation of Small Businesses, one third of all payments to small firms in the UK are late, often by a month or more. The government hopes to tackle the problem with the creation of its new Small Business Commissioner this year, but official attempts to tackle the problem have a pretty chequered history.

‘A lot of SMEs will invoice the customers and then get on with all the other things they’re trying to manage, and then neglect to follow up,’ says Robson. ‘A lot of owners we speak to feel embarrassed to call a client and say "We haven’t been paid in 60 days." But clients respect owners that manage their business well.’

Haggle with your own suppliers

If you’ve been waiting ages on a payment then it might be tempting to pay your own suppliers late, but you should avoid doing so if you don’t want to foster a bad reputation. That said, it’s worth negotiating hard in the first place, not just on cost but also on payment terms. Any extra time you can get before you need to pay them can make your cash situation that little bit healthier. Even if you’ve already agreed terms, if your payments are due and you’re in a tight spot then it’s always worth asking for some flexibility.

Considering invoice finance?

Invoice ‘factoring’ - where lenders buy your unpaid invoices from you (at a cost, of course) is a well established practice, but it can be a bit of a faff. ‘Everybody wants a lot of detail,’ says Brand. ‘Effectively you’re borrowing from your future income, so if a customer isn’t happy or your contracts aren’t solid, the banks get slightly worried about it. We looked at it a couple of times but it was so complicated we just cracked on.’

In the last few years companies like MarketInvoice have sprung up on the promise of making the process more straightforward. ‘It’s quite flexible these days,’ says Robson, ‘Invoice financing through crowdfunding is a very good tool to use.’

Image source: Luke Addison/Flickr

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