Accelerator: Finance - 25 cashflow tips

You may have the greatest product or service and enjoy soaring sales and even healthy profits, but cash - or rather cashflow - is truly king for businesses. Poor cashflow can be the death of an otherwise healthy business, particularly among small and fast-growing firms. These may be unable to obtain further loans to ease cash shortages or are building up staff and inventory costs faster than customers are paying.

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Last Updated: 31 Aug 2010

If businesses have no cash in the bank and cannot pay their bills, their creditors will ultimately call in the liquidators. And, as Chris Lilly points out in The Start-up Survival Guide, trading while not having a reasonable idea as to how bills are going to be met is unlawful.

Poor management of cashflow is said to the prime reason for the failure of small firms, and as many as 10,000 UK businesses go to the wall each year because of late payment of monies due.

Here, Steve Lodge presents 25 tips for boosting your overall cashflow position.

1. BILL PROMPTLY

It may be all to easy to be distracted by the next job, but it's important to issue invoices promptly once work is done: realistically, customers are going to pay only if they actually receive an invoice. Consider having a system for sending out invoices, say, within 24 hours of a chargeable event. If you have a system for producing immediate invoices then arguably you are also in a better position to ask for payment on delivery. Use first-class mail, and on very large accounts phone the customer to confirm that invoices have been received.

2. AGREE TERMS UPFRONT

If you can get paid when an order is placed, on completion or delivery, then all the better. But getting paid so quickly may not always be possible - in which case you should at the very least find out when your customer plans to pay you. Ideally, you should seek to reach agreement on acceptable payment terms in advance, and confirm these in writing to help avoid disputes down the line. Your firm should also have its own defined credit policy, and you should make customers aware of this in the absence of other agreement. When taking on bigger and longer-term projects - or clients - agree a regular payment schedule rather than letting the full amount build up to completion of a job. Note that it may be in your customer's interest that you don't go out of business trying to meet its demands.

3. STALK THOSE PAYMENTS

Chase up monies as soon as payment becomes overdue, and even consider sending a reminder two weeks before the official due date. Maintaining timely collection practices and regular communication with your customers can help avoid problems snowballing, and it is worth planning to accommodate some collection activity time every week.

4. OFFER EARLY-PAYMENT INCENTIVES

Even a discount of 1% to 2% might make all the difference. And getting paid within seven days may even be feasible. A discount against future work for prompt payers might also be worth considering. A note of caution, however: bear in mind that some customers are likely to be good payers regardless, so offering them a discount may merely fuel more price negotiation.

5. AVOID SLOW OR NON-PAYING CUSTOMERS

Do your homework, particularly with significant customers. Ask for and check credit references; contact other businesses that have had the same client; consider paying for a credit check from the likes Dun & Bradstreet or Experian. Negotiate deposits or staged payments for large contracts. If the customer can't even come up with an initial deposit, it may be worth turning the job down: consider the time you might have to spend collecting payment later.

6. EMPLOY A CREDIT CONTROLLER

Inevitably, there will be customers who won't pay on time and who seem to pay only when it suits them or after you have hassled them. Having someone on staff with responsibility for reducing overdue monies could help avoid sales staff putting relationships at risk by chasing debts.

7. CASH IN YOUR INVOICES

Selling your invoices to a factoring company means you get your money when the invoice is first presented. The factoring firm then collects payment, which also saves you time on credit control, freeing up resource to concentrate on service and sales. However, businesses normally receive only 80% or less of the value of their invoices upfront - more when the factor receives payment - and typically incur costs of up 3% for collecting the monies, plus an interest charge on the cash advanced. Non-recourse factoring protects you from customers who fail to pay - normally through the use of credit insurance - while recourse factoring leaves you with the risk of bad debts. Factoring is disclosed to your customers, who pay the factor. You'll want to be confident that using a factor will not worsen a customer relationship by, say, heavy-handed collection. Factoring may also reduce what you can borrow from the bank, as outstanding invoices will not be available as security. Indeed, factoring is often seen as an alternative to a bank overdraft.

8. IMMEDIATE CASH WITH CONTROL

Instead of outsourcing debt collection to a factoring company, with invoice discounting you get immediate cash but retain control over payment chasing. Also, the service isn't disclosed to customers.

9. CHARGE INTEREST ON LATE PAYMENTS

Many businesses will see charging interest as a last resort for getting invoices paid. At worst, it could mean losing a customer or risking a dispute with a major client for a relatively small amount of money. Even so, under the 1998 Late Payment of Commercial Debts (Interest) Act, businesses are now entitled to claim interest on overdue monies at the equivalent of Bank of England base rate plus 8%. Debt recovery costs for up to £100 can also be claimed. Even so, Business Link, the Government's small-business advice service, says if other businesses in your industry don't charge interest it may not be sensible for you to do so. The Better Payment Practice Campaign (www.payontime.co.uk) has a range of information and help.

10. CASHFLOW FORECASTS AS A BUSINESS TOOL

A cashflow forecast should help you identify peaks and troughs in your bank balance and so help planning - particularly for borrowing. It should identify the source and amounts of cash coming in and the destinations and amounts going out of your business over a period, and be updated in line with actual performance. Accounting software will do the number-crunching, including what-if? calculations. The key is to use the forecast as a business tool: to give advance warning of potential cashflow problems and to ensure that you have enough money to pay bills and so avoid late-payment charges. Banks often require a cashflow forecast before considering a loan.

11. DIP INTO YOUR PERSONAL SAVINGS

This is probably the cheapest way to improve cashflow in the short term. While you may miss out on interest on your savings, this cost is likely to be much lower than the debt interest your business would be incurring on this funding. Alternatively, you could draw less money out of the business - perhaps by taking a reduced salary for a while, or no salary.

12. PAY BY CREDIT CARD

With most credit cards you will have a few weeks in which to pay off your bill before any interest starts accruing. And some cards will have a 0% introductory offer lasting a few months - although if you don't repay your balance at the end of this period, you'll be hit by hefty interest costs. Find a 0% deal or other low-cost card through www.moneysupermarket.com

13. LOANS FOR LONGER-TERM BORROWINGS

A business loan rather than an overdraft can be sensible for longer term borrowings that you plan to repay steadily over time. Interest (on loans and overdrafts) is also tax-deductible as a business expense. You can and should shop around - loans aren't available only from your existing bank. Rates on loans secured against assets, including business premises or your home, should be lower than on unsecured loans, but these assets are then at risk if you don't keep up the repayments. Consolidating existing loans can make sense if you have existing debt at high rates, or even just to simplify outgoings. Consolidation will also often improve cashflow by reducing monthly repayments, but in return for a longer loan term. Using a finance broker such as www.simplybusiness.co.uk to help find the best deal for the type of finance your business needs.

14. NEGOTIATE PAYMENT TERMS WITH SUPPLIERS

Ask your suppliers for extended credit terms: giving incentives such as large or regular orders could help. In some cases, buying on sale or return may be an option. Suppliers could even be open to barter deals, helping your business preserve cash. Some suppliers may also offer a discount for early settlement of bills.

15. SCHEDULE PAYMENTS TO SUPPLIERS

Unless there is a discount for early payment, in general you should look to pay suppliers as late as possible. Having said that, there may be valued suppliers you want to pay earlier for fear that they won't deal with you again. Consider arranging a payment schedule that eases the strain on your finances so that all bills aren't due at once.

16. OVERDRAFTS FOR SHORT-TERM BORROWING

An overdraft is likely to cost more than a loan for long-term purchases, but its flexibility - you can borrow a precise amount just for the time that you need the cash - makes them good value for shorter-term borrowing. Overdrafts are generally quick to arrange, but exceeding the agreed limit means high charges. They are linked to your business bank account, so banking costs and alternative accounts are worth reviewing regularly. See www.moneyfacts.co.uk

17. STICK TO BUDGETS FOR EXPENDITURE

Know what you're going to spend on company supplies and new equipment and stick to it. Don't overspend on non-essentials. Control overheads, add employees cautiously (consider outsourcing in the interim), and make sure staff aren't spending you into difficulties.

18. KEEP INVENTORY LOW

Don't buy inventory based on hopes and dreams. Consider, for example, ordering less stock but more often. It may also be worth looking at changing your product mix, dropping items that tie up cash the longest and switching to faster-moving product.

19. LEASE ASSETS TO CUT COMMITMENT

Leasing gives the use of an asset without paying for it all at once - in effect, you pay for the asset with the income it generates. It's a rental agreement; almost anything can be leased and contracts are flexible and can be tailored to your needs. Lease payments - usually fixed, helping cash management - are generally tax-deductible as a business expense. If you require the asset for much less time than its useful life, look at an operating lease - in which you do not share in any subsequent sale proceeds. If you require the asset for most of its working life, you may want a finance lease, which normally lets you continue paying a peppercorn rent for use beyond the initial lease. Unlike hire purchase, you rent the asset with an option to purchase. You can claim capital allowances as though you had bought outright.

20. DRAW OUT CASH WITH SALE-AND-LEASEBACK

In sale-and-leaseback (also called purchase leaseback), you sell an asset that your business already owns to the leasing company for fair market value or written-down book value, and then lease it back.

21. GET THE BEST RETURN ON YOUR CASH

A credit card or overdraft is likely to charge more in interest than you can earn in a savings account, so always look to pay down those first with any positive cashflow. But if these debts are repaid and you still have spare cash, consider opening a business savings account. This is likely to pay a higher interest rate on credit balances than your current account. Shop around for the best deal (try www.moneyfacts.co.uk) - accounts don't need to be opened with your existing bank.

22. TAKE ADVANTAGE OF VAT RULES

If you are registered for VAT, it may make sense to buy big items at the end rather than the start of VAT periods. You can then set the purchase VAT against the VAT you charge on sales, so giving a temporary cashflow advantage. For businesses with a turnover up to £1.35m a year, the Annual Accounting VAT simplification scheme allows payments to be spread throughout the year, while the Cash Accounting Scheme allows eligible businesses to defer VAT until they have received payment from customers - rather than at invoicing.

23. RESPOND TO TAX CARROTS/STICKS

Many financing arrangements can be treated as business expenses for reducing taxable profits. But there are also other potentially attractive tax breaks such as capital allowances for plant and machinery - where 50% of cost is tax-deductible in the first year - and the ability to multiply R&D costs by 150% for offsetting against taxable profits. As well as these tax carrots, respecting tax deadlines (for PAYE, self-assessment, corporation tax etc) will save on penalties.

24. KEEP PROSPECTING

New business development is key to ensure that work doesn't dry up. Don't just promote your business between jobs. Build effective alliances to leverage marketing resource and enhance visibility, and get referrals from current clients. Consider putting together project-oriented teams with third parties and working for multiple clients at a time to spread the workload.

25. CONSIDER THE BIGGER PICTURE

Selling products that lose money will inevitably put a strain on cashflow and so may make no sense. But don't rule out selling off a product line or a highly profitable part of your business to improve your overall financial position. Disposing of equity may also be worth considering - but beware of undervaluing your business.

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