Last editedMay 20202 min read
The importance of cash flow for small to medium size businesses can’t be underestimated. Poor cash flow can paralyse your business and put you in a situation where you’re struggling to pay your bills. That’s why getting cash flow management right should be a crucial element of your business plan. So, how can you ensure that you’ve got cash on hand, when you need it? Check out some of our best tips for managing cash flow to find out.
1. Ensure you’ve got an airtight credit policy
Extending credit to customers can be a difficult subject to navigate. While it’s often an effective way to deepen your relationship with a client, it’s not uncommon for customers to take advantage and drag out the payment process. This means that you’ve got working capital tied up on your balance book and forces your accounts receivable team to waste time and effort chasing the payment.
To minimise the risks associated with extending credit, be sure to establish an airtight credit policy for determining which of your clients are eligible for credit, and which aren’t. Then, enforce that policy rigidly. Ensure you’re running a credit check on all new customers before you provide them with credit. You should also monitor your accounts to identify potential late payers and try to work out a solution before the situation gets too difficult to handle.
2. Build up a significant cash reserve
Sometimes, your business is going to run into issues with cash flow. When that happens, you’ll need access to capital, fast. One of the best cash flow risk management solutions is to build up a large cash reserve. This can provide a handy barrier against unexpected economic events or late payments, giving your business a little more space to breathe when dealing with banks, lenders, and the whims of the economic sector more generally.
There are many different strategies you can use to start managing cash flow better and build up a large cash reserve. For example, cutting your overheads could bring in more money, while you could also consider renegotiating any outstanding loans held by your company. By agreeing to a longer loan term, you’ll have lower monthly repayments which could allow you to set aside even more cash for your company’s emergency cash reserve.
3. Think about invoice financing
Another potential cash flow risk management solution revolves around invoice financing. Essentially, invoice financing allows you to borrow against the value of your business’s outstanding invoices. You’ll be fronted a percentage of the value of your invoice in exchange for a fee from a third-party. There are a couple of different forms of invoice finance, including invoice trading, invoice discounting, and invoice factoring. If your business is in a position where it needs a short-term capital injection, invoice financing could be a viable cash management strategy.
4. Improve your company’s invoicing process
Optimising your invoicing process can be a major cash management solution. Many businesses struggle to send out invoices on time, waiting days or even weeks after the product/service has been delivered. This holds up payment needlessly and means that you may not have the cash you need exactly when you need it. Furthermore, it’s not uncommon for invoices (particularly those produced manually) to include errors – such as inaccurate email addresses – which introduce further delays to the process.
Essentially, you need to ensure that invoices are going out as soon as possible and with a minimal number of errors. By delivering your invoices promptly, you can get paid more quickly, which has an enormously beneficial effect on cash flow management. It may also be a good idea to look into an automated invoicing tool. This can speed up the invoicing process and reduce the number of mistakes arising from human error.
5. Consider using an automated payments collection system
Finally, it can be beneficial to use an automated payments collection system like GoCardless to handle your payments. Using Direct Debit, you can choose what date you take payment, while you’ll also be able to collect payment automatically. This provides your business with a regular cash flow and stops your accounting team from wasting time chasing up late payers.
We can help
GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.