Credit and Finance, Management
Protect your cash flow with these expert tips
Posted on by Katie Hook
Estimated read time: 5 mins
Maintaining good cash flow is vital to the life blood of a small business. Here’s how to keep yours healthy.
Chasing overdue invoices is the bane of every small business owner’s life. But in addition to taking up precious time, late payments can create a serious dent in your cash flow.
We sat down with Steve Marriott, Senior Product Manager at Experian Business Assist, to get his practical advice on how businesses can better manage theirs.
Q: Why is good cash flow so important?
A: Quite simply, without good cash flow, it becomes very difficult for a small business to pay their own bills and suppliers. Having to pay late can result in your business gaining a bad reputation and if you file a new set of accounts and your available balance is low, or lower than previous filed accounts, it could have a negative impact on your business credit score. That in turn can affect your ability to get preferential terms with suppliers, or you could even be turned down for a business loan or credit card.
Q: What can happen when cash flow is not protected?
A: There have been some examples recently of big businesses failing and, without good cash flow, being unable to pay their smaller subcontractors. This creates a huge domino effect, with SMEs (small and medium-sized enterprises) potentially needing to lay off staff, scale back their operations or, in extreme cases, going out of business.
Although the effects of a big business failing can be catastrophic, they are rare. With SMEs, sadly, it’s much more common, so it’s really important to protect your cash flow with any customer or supplier you work with.
Q: So, what can small businesses do to protect themselves?
A: Firstly, make sure you perform due diligence before entering into any agreement with a new customer. This also applies to a new supplier. If they fail to deliver a product or service to you, this can have knock-on negative effects, such as you being unable to fulfil your own orders or have to deliver them late, resulting in poor customer service and a bad reputation.
Perform a simple credit check to make sure the business is who they say they are. Check that their documents are all filed on time and up to date. They should have a healthy credit score, or at least one that you feel comfortable with. Do a good background check – who are the company’s directors and what is their track record like? Are there any warnings from Companies House? Do they have any County Court Judgments against them?
We have a feature within Experian Business Express that highlights a company’s negative payment indicators. This shows how far past agreed terms they are typically paying their suppliers – Days Beyond Terms (DBT). If a company is regularly paying later than the industry average, this can be one of the first signs of a business that’s in distress.
Q: Is it important to check existing customers too?
A: Absolutely. New customers and existing ones are equally risky. Just because you have spent time building up trust with someone, doesn’t necessarily mean they’re going to pay you on time. Performing a business credit check can give you some insight into the warning signs. I’d always recommend continuing to monitor your customers throughout your relationship with them. We have a great tool within Experian Business Express that will send you email alerts on your customers when any warning signs are picked up, such as their credit score changing, they file a new set of accounts or they have a court action placed against them.
Q: What can businesses do to tackle late or non-payments?
A: The good news is that many late payments are simple to solve. An email and follow up phone call are often enough to nudge someone into paying. Accounts Teams sometimes only pay invoices on a particular day of the month or insist that invoices are received by a certain date. Ensuring you have this information in advance will save you a headache.
If, despite calls and assurances, you still aren’t receiving payment, a good tactic is to put a halt on supplying any more goods or services until the invoice is settled.
My advice would always be to be proactive and when you spot any warning signs, engage with your partner or supplier to understand any issues and request prompt payment. Ledger Manager, a tool available within Experian Business Express is really useful for highlighting and helping you to prioritise your outstanding and bad debts.
For access to a range of tools to help you keep on top of your cash flow, register now for your free trial with Experian Business Express.