Top tips on
Cash Flow Management
External finance may
offer some relief to cash flow crises, but if companies learn to manage their
cash flow more efficiently within their organisations,
they could avoid or significantly reduce the unnecessary cost and time spent on
external financing. Much of this is
common sense and easy to apply, so small businesses can control their own
cash flow rather than being at the whim of external financiers and credit
committees. To avoid going to the banks for invoice discounting, factoring,
overdraft or any form of debt, here are a few simple internal strategies:
- Bill
early: Send
a bill as soon as you have rendered a service or sold your goods. For longer
term contracts, arrange for stage billing or, even better, upfront payments.
- Follow
up quickly and aggressively: Make
a phone call within one week of raising the invoice to check it has been
received, call within two weeks to check it has been authorised and write a letter within 30 days of an invoice becoming overdue. Escalate
the seriousness of letters through to legal action if required and you can also
claim statutory interest at 8% over base plus costs for overdue amounts. Always
keep notes of actions taken and conversations.
- Make
it easy for customers to pay: Ensure
there are no invoicing errors and that payment instructions including your bank
account are clearly marked on the invoice.
- Avoid
‘no pay’ or ‘slow’ customers: Be
upfront with your customers about your credit policy and terms and understand
their internal payment and authorisation
procedures. You should only trade with customers with a good credit record.
- Initiate
a regular payment system: Encourage your clients to pay using a direct
debit or standing order or by online banking or BACS – this ensures you can use
the funds more quickly, minimize the payment cycle and is cheaper in bank
charges for you and your customer.
- Discounting: Offer incentives for prompt payment but assess the cost and benefit of
this approach and only give the discount if your customer keeps to their part
of the bargain.
- Bartering: Swap your services or products with a customer who has products or
services you need. Settlement of invoices is immediate.
- Focus on getting this
right the first time, and maintain a good financial management discipline by
keeping accurate records, tracking key performance indicators and employing
appropriately qualified and skilled financial staff. Outsource to specialists
if you need to!
Top tips on Cash Flow Management were provided by Gary Jesson, Managing
Director of e-Financial Management Limited, the financial management
outsourcing company that offers expert solutions from Bookkeeping to Finance
Director, on a pay–as–use basis.
Written by Gary Jesson.
(June 2010)
