How to control cash flow
Posted on by Cindy Yip
Estimated read time: 5 mins
The age old saying of “revenue is vanity, profit is sanity, but cash is reality” indicates how important cash flow is in maintaining a successful business.
It is vital to control cash flow so that businesses are fully prepared if the unexpected may happen. In this article, we will be focusing on recruitment agencies in particular, providing tips on cash flow management to equip companies within this sector with the knowledge to gain healthy longevity.
Analyse & set targets
Control cash flow by creating and maintaining a forecast that can be updated regularly, preferably on a weekly basis, in order to provide an accurate outlook of your company’s financial performance for the next year. This will state whether you will be able to manage operations, from making payroll and paying suppliers, to buying goods and fulfilling orders, and it will also ensure there is sufficient revenue to fund growth. It is also advisable to have cash reserves to minimise any unexpected shortfalls.
Know the breaking point
If you are a start-up recruitment agency, knowing when you will break-even will enable you to forecast ahead and budget accordingly, especially if unpredictable income streams are present. Even though this point will not necessarily affect your cash flow, it will help you to reach your profitability end goal.
Tracking and handling your finances in an efficient manner will save time and stress. The easiest way to do this is to hire a CFO, or employ the services of an external accountant who can also handle payment deadlines and tax returns to avoid interest hikes and penalties. If this is unachievable, then designate a trusted employee to monitor the cash flow and use detailed reporting software. As an aside, as a recruitment agency you should be in a good position to hire top talent among the rest of the team. Your return on investment will be much greater, as a skilled workforce that is quick, competent and can think on their feet will soon outweigh the cost of higher salaries.
Technology gives maximum flexibility in managing cash flow, as it can be accessed from wherever you are when using cloud-based accounting and storage. This not only keeps data secure from loss, theft and file corruption, it also saves you time, and the unnecessary stress and associated hassle of being chained to a desktop. Using Experian’s business express software is also a future-proof way of credit checking the financial records of clients and customers each month to minimise any payment risks. The system also automatically updates you with any changes to client’s circumstances, and it can even facilitate one-off checks at the start of a new business relationship to make sure everything is on track from the get-go.
Offer payment packages
Offering clients discounts, retainers or fixed rates if they settle their payments early, means that you do not have to wait for months to get paid or for normal net terms to pay out. Regular billings in advance of placing candidates injects a steady flow of cash into the business rather than being held in arrears, so outgoings can be planned more efficiently.
Agree clear payment terms
Invoice clients via email as soon as the work is completed and make clear when the invoice is due. Try to insist on online payments instead of cheques, which will also speed up payments, and use direct debits for collecting receipts. Keep abreast of payments, especially so you know if any are overdue, but it is always good practise to pay within 30 days. However, if you find you require flexibility then you can try negotiating with suppliers to extend payables to help manage your cash flow.
Do not focus on profit
Some recruitment agencies prioritise profit margin forecasts over cash flow plans from the outset. Good cash flow is essential to survive, particularly in the first few months of trading, so young businesses should initially work with reliable customers who pay on time, even if it means working for clients with smaller budgets. Larger profit margins are not the be-all and end-all when your business starts out.
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