Success Programme

Start-Ups & SMEs – How to Improve Your Cash Flow

Success Programme

There are two fundamental goals at the heart of improving your cash flow: controlling your expenditure and regulating your income. To that end, here are 12 clever tactics and useful services that can help smooth out peaks and troughs.

20th June 2023

1. Chart of accounts

At Old Mill, we understand that achieving effective cash flow management begins with gaining a comprehensive understanding of the money flow within your business. This initial step, although seemingly mundane, holds great significance. To facilitate this understanding, accurate and up-to-date information is crucial. Irrespective of your business’s size, it is imperative to regularly receive a steady stream of data encompassing debtor books, budgets, and cash flow forecasts, all readily accessible at your fingertips.

Considering the importance of real-time information, we recommend considering an investment in an accounting software package. By embracing technology, such as Xero, you can benefit from the advantages of real-time data, empowering you to make informed decisions promptly and effectively.

2. Combat seasonality by diversifying

Within every business, income and expenditure tend to fluctuate, potentially disrupting cash flow if not managed appropriately. Seasonal businesses, not limited to Christmas cracker makers or Easter egg producers, often face significant costs during their quieter periods. Recognising this challenge, it becomes essential to consider diversification strategies carefully, ensuring they complement rather than dilute your existing business model.

Moreover, exploring corporate finance opportunities for expansion or acquisition could present valuable solutions to combat seasonality effectively.

3. Establish debt chasing procedures

Effective cash flow management relies on robust credit control and debt recovery practices. According to PricewaterhouseCoopers (PwC) research, current debt levels pose a significant threat to the survival of nearly one in five companies. To mitigate this risk, it is advisable to establish a structured debt chasing procedure with  a systematic approach that includes timely follow-up calls, limited re-issuance of invoices, and escalating actions when necessary. Delayed debt collection can significantly diminish the chances of successful recovery.

To maintain a strong financial position, it is crucial to proactively engage with customers. For instance, if your customers adhere to 30-day payment terms, initiating contact on day 31 to enquire about pending payments reinforces your position.

4. Understand customers' payment cycles

Developing a deep understanding of your customers’ payment cycles can greatly benefit your credit control system. By aligning your processes with their payment patterns, you can optimise your cash flow. Missing a customer’s cheque run can result in an additional month of waiting time, directly impacting your financial stability.

To enhance your payment prediction capabilities, we recommend utilising tools like Xero. Leveraging its features, you can accurately anticipate payment patterns, enabling proactive cash flow management.

5. Negotiate payment plans with customers

Once you have gained comprehensive knowledge of your customers, it is worth exploring the possibility of negotiating early payment plans. Such arrangements can significantly improve your cash flow, ensuring you receive payments ahead of schedule. Incentives, such as offering discounts for immediate bill clearance, can serve as effective motivators. As you possess unique insights into your customers’ preferences and circumstances, don’t hesitate to leverage this knowledge to your advantage.

6. Invoice accurately

Accurate invoicing is essential to maintain smooth cash flow. Research by PwC indicates that around 85 percent of non-payment issues raised by business customers relate to invoice queries or poor administration. To ensure the basics are in order, it is crucial to invoice the correct amounts promptly and send them to the appropriate recipients.

7. Use a third party to collect your debts

In cases where other measures have failed, and a significant amount of cash remains tied up in unpaid debts, outsourcing debt collection to a reputable collection agency becomes a viable option. While the reputation of collection agencies varies, industry figures from the Credit Services Association (CSA) demonstrate their potential to recover substantial amounts, totaling up to £5 billion annually. However, it is crucial to select a trusted collection agency based on personal experience or recommendations to ensure favourable outcomes. Utilising software platforms or other reputable collection agencies can address your specific debt recovery needs.

8. Customer credit history

Performing credit checks on customers prior to engaging in business transactions is a prudent practice. Additionally, regularly monitoring their payment practices throughout your business relationship can provide valuable insights. Purchasing status reports from credit agencies enables you to access comprehensive customer details, financial results, payment histories with other suppliers, county court judgments, and recommended credit ratings. It is essential not to pursue transactions with customers who prove to be good purchasers but unreliable payers.

9. Establish good relationships with suppliers

Cultivating strong relationships with your suppliers can have a positive impact on your cash flow. Such connections prove invaluable, especially when faced with potential issues down the line. Proactively negotiating favourable payment plans with suppliers from the outset lays the foundation for a mutually beneficial partnership. As your business grows, these relationships can lead to opportunities for credit accounts, allowing you to defer payments and improve your cash flow.

10. Review your payroll system

Optimising your payroll system can significantly alleviate cash crunch situations. It is worth investing time in finding the best payroll solution tailored to your business needs. Exploring options such as new payroll software, particularly cloud-based solutions offering automated features, or outsourcing the payroll function to specialised experts can bring numerous benefits. These include automated Payslip production, online access for your team, comprehensive salary reports, and regular updates on legal compliance matters.

11. Clear terms and conditions

Clearly defined terms and conditions form the basis of any agreement and play a vital role in preventing misunderstandings. By establishing transparent expectations and obligations upfront, you strengthen your position in collecting outstanding amounts in the future. It is crucial to emphasise that your business not only sells products or services but also agrees with the buyer on what and when they will make payment.

12. Cut costs and spread payments

Strategic cost-cutting measures and spreading payments can have a positive impact on your cash flow. Carefully assess purchases and limit them to essential items only, avoiding unnecessary expenditure. Spreading out payments rather than making lump-sum withdrawals from your cash flow can provide relief. Options such as hire purchase and leasing arrangements offer flexibility when financing various assets, including; vehicles, machinery, furniture, and equipment. By considering these alternatives, you can effectively manage your cash flow while ensuring necessary investments are made at the appropriate time.

Talk to Old Mill

Remember, these tips are just the beginning. At Old Mill, we offer personalised guidance and support to help you optimise your cash flow and drive business growth. Get in touch with us to discuss your specific needs and explore the potential of your business.

click here…