Reinvigorate and stimulate your cash flow
Posted on by Cindy Yip
Estimated read time: 5 mins
You’ve all heard it before, cash flow is king. Whether you’ve just set up your business or you’re an established and growing business, a constant flow of cash is key to running a successful business. With the economy being so volatile and new legislations and laws being put in place, business owners are looking for ways to squeeze as much cash flow as possible out their existing operations. The formula seems straightforward enough – collect your receivables as fast as possible and delay your payables without putting relationships with your suppliers at risk. Some companies are much better than others at doing this – research shows top-performing companies collected from customers 17 days more quickly than typical companies and stretched payables by an additional 10 days(1). Here are a few steps you can take to improve your cash flow:
Cash flow analysis and forecast
The key to understanding the cash in your business is getting insight into your current finance and predicting it for the future so you can anticipate any cash flow problems in advance. Get to grips with where the cash is going in and out of the business. It’ll be difficult to tackle your cash flow as one big chunk so try to segment it into suppliers, customers and inventory.
With your suppliers, separate them into your regular suppliers and the occasional ones. The ones which you regularly purchase off, you’ll have a better chance of negotiating better terms and discounts.
With your customers, take a look at them all and find out who your ‘key customers’ are. For your sales department, this may mean the customer with the biggest revenue, but for your accounts, they could be the worst as they pay the latest. Understand your customer’s situation to be able to approach different sets of customers differently.
And when looking at your inventory, find out where your cash is tied up in the most and not making revenue for you, and which inventory is flying off the shelves with high margin revenues.
Customer invoicing and collection systems
Ask yourself these questions:
- How long is it taking you to get paid? If this is longer than you anticipated, it suggests your cash collections aren’t rigid enough and as time passes, customers will forget the value you gave to them and be less willing to pay.
- What is your collections process? Make it as easy as possible for customers to pay you, with online invoices and the ability to pay online or over the phone; this way it improves your customer service to them too.
- Are you getting the right level of contact with customers? Remind customers in advance of their payment days to ensure they don’t forget you and you’re part of their outgoings for the month.
- Are you identifying disputes fast enough? And once identified, what is your policy for claiming it back? Keep on top of your problem payers as letting their payments slip will mean payments to your own suppliers slipping.
Improve your collection processes by taking your sales ledger and combining it with our credit information to show exactly where your outstanding money is; click here for more information.
Paying your bills and evaluating your terms
First thing to do here is check to see how well your customer and supplier terms are balanced, are your customers paying you before you need to pay your suppliers? Your payable days should ideally be longer than your receivable days to keep your cash flow afloat. See if the terms you’re being offered by your own suppliers match up to that in the marketplace, you can use this as a source of negotiation when speaking to your suppliers as it always helps to have as long a payment term as possible. They may even offer discounts for paying earlier or for certain payment methods.
Qualify prospects and suppliers with our UK business credit reports and set appropriate credit limits to reduce your business’ exposure to potential bad debt.
Make it a companywide priority
If improving cash flow is a priority in your company, whether it’s a first priority or the top few on the list, make sure all your employees understand this. Remember, all employees work to targets so they need something to work towards to help improve your cash flow. Collectors should have collection targets and sales staff shouldn’t just have revenue targets but bearing in mind the quality of that revenue and if invoices are unpaid, then this will be a reflection of their performance or commission. Employees need an incentive to work towards the same goal as you and your company.