Cashflow is the lifeblood of any small firm and needs to be meticulously managed. Read this guide and ensure you're not left empty handed
Access to finance is an ongoing challenge for many small businesses. Traditional routes for raising capital are often less flexible and some finance options, such as overdraft facilities, are dwindling in their availability. To ensure their own survival and growth, small businesses need to put in place processes that manage their cashflows better than ever before.
Credit control – seeing red
Outstanding customer invoices, if allowed to accumulate, can ruin a small company that relies on regular income to cover operating costs. A robust credit management system that monitors overdue payments and follows proper processes to recover the debt, can mitigate this risk and is simple to implement. Outbound credit communications, for example a standard monthly statement and letter, can help you successfully recover debt with just a gentle reminder.
When payment is continuously delayed, adopt a firmer tone and a more direct approach: call them and refuse any further services or goods until the debt is cleared. Understand that you have leverage – especially if you provide an essential service. Continuing to trade with debtors when they owe your business money is poor practice and will challenge the survival of your firm.
Diversification – don’t put all your eggs in one basket
No one customer should owe your business more than 50% of the total sales ledger. However, in our experience, the smaller the business, the more concentrated the ledger, often with only one or two big customers. This lack of diversification exposes your business to a variety of risks that can impact your long-term growth plans.
It’s vital that you spread the ledger across different clients as soon as possible as all it takes is one payment problem (e.g. a major client going out of business) or an invoice dispute to put your business at risk. To avoid this, make sure new business and current clients both receive a balanced service. A diversified client base also helps secure better value finance: lenders will offer better rates and decrease the amount of security they require if a small business has spread its ledger.
Tighter credit terms – pay now, not later
Small and medium size businesses are typically guilty of lax payment terms. Ultimately 60/90/120 day payment options are not viable for smaller companies with monthly overheads and limited capital. We have seen extreme cases of firms with major customers on 150 day payment terms being paid twice a year! As a small business, you have to confidently and cleverly negotiate the best credit terms for your operations – some ideas are:
If your customer is a large company, check whether or not they have a supplier finance scheme. If they do, you’ll pay a fee for prompt payment (usually within 14 days of you issuing an invoice). Understand exactly what that fee is and factor the pricing into your invoices to cover the charge. That way you won’t end up out of pocket, even when paid on time
If your customer has lengthy payment terms, offer them a discount for early payment. Should they not accept, make sure your total invoice covers most of the fee an invoice finance company will charge you for covering the shortfall.
Alternative finance – read the small print
If you’re struggling to secure finance from the bank, consider your alternative finance options. There are many competitive products available, just watch out for the hidden fees buried in the small print with some lenders. These costs are often not presented upfront, and can affect your company’s financial stability with unexpected increases to your capital and operational expenditure.
An arrangement fee, for example, is a very common one-off admin fee of 1% to 10% of your loan, charged at the start of the contract to cover the costs associated with arranging the finance. Another fee commonly hidden in the fine print is the take-on fee. This covers invoice finance charges at up to 2% of the total invoice value.
Cash management – never run out of cash
Small and medium size companies should identify their tier-two suppliers, and negotiate longer payment terms if possible. This helps balance the cashflow in and out of your business, giving you leeway to recover debt from your customers, without getting into debt with your suppliers.
To do this you need organised finances that present a clean, clear picture of your management accounts, cashflow forecast, and aged creditors. With your accounts in order, you’ll benefit from a higher level of trade credit, more cash in the bank and a better approval rate for securing finance.