21 cash flow tips
Article Date: Dec 20 2006
There are two fundamental goals at the heart of improving your cash flow: control your expenditure and regulate your income. To that end, there’s a raft of clever tactics that can enable you to explore expansion opportunities and reduce the chance of being caught short if the unexpected happens.
1. Ensure you have good financial reporting
The first step to good cash flow management is to understand the ebb and flow of money through your business. For that, you need accurate, up-to-date information. Whatever your size of business, you should be routinely receiving a regular stream of data from your finance department. Management reports (for reviewing your current balance sheet), debtor books, budgets and cash flow forecasts should be at your fingertips.
Neville Upton is CEO of customer insight specialist The Listening Company and he’s in the enviable position of not worrying about cash flow because his finance team have a firm grip on the numbers. He says, ‘I can get on with growing my business. Ideally, that’s the situation any CEO should be in. As a result, having started from scratch in 1998, we are on course to hit £25 million turnover this year.’
2. Combat seasonality by diversifying
All businesses have fluctuating levels of income and expenditure, which can play havoc with cash flow if not properly managed, especially if the peaks and troughs are unpredictable. For businesses where demand for goods and services is affected by seasonality, this often means they face their greatest costs during their quietest period. And it’s not just Christmas cracker makers or Easter egg producers that are affected by annual highs and lows.
James Lambert, chief executive of ice cream manufacturer Richmond Foods, knows that sales will always peak in the summer months, but he’s managed to diversify and pile up profits in the winter months too. The secret, he says, is being innovative while playing to your strengths. ‘Our Skinny Cow range is a good example of this, as low-fat ice cream sells particularly well in January. While you can sell anything when it’s 85 degrees outside, in winter you have to be clever.’
3. Establish debt chasing procedures
Credit control and debt recovery are vital pillars of good cash flow management. PricewaterhouseCoopers (PwC) research indicates that nearly one in five companies regard current debt levels as the ‘biggest threat’ to survival.
Julian Roberts, director of PwC’s receivables management group, urges, ‘It’s a good idea to establish a structure to the debt chasing procedure.’ He recommends that follow-up calls take place after a certain interval, invoices are re-issued a limited number of times and if that fails, a more serious course of action kicks in.
The longer a debt remains unpaid the harder it becomes to collect. ‘If your customers are on 30-day payment terms, someone has to call on day 31 and ask where the payment is if it hasn’t arrived. If you don’t do that, you immediately weaken your position,’ says Jeff Macklin, co-author of Finance on a Beermat and MD of FDUK, providers of part-time finance directors to ambitious companies.
Ultimately, debt chasing is about maintaining a delicate balance in client relationships – keeping them happy while getting your money. Established in 1918, Lantex Manufacturing has had 88 years to get it right. ‘We maintain in-house credit control and it works well because we’re a small company with a good rapport with our clientele,’ says Margaret Sangster, FD at the Lancashire-based textile manufacturing firm.
4. Incentivise management to take responsibility for cash flow
Michael Wilmshurst became chief executive of Nationwide Accident Repair in 2002 after a hostile takeover and soon became aware that credit control was not part of company culture, so he began incentivising management to take responsibility. ‘Credit management needs to be part of managers’ jobs, not just something to blame on the finance department,’ he says. ‘A £1,000 debt that passed 90 days overdue would cost the manager £100. Suddenly all the managers found a way to get their money.’
The Listening Company has taken this idea a stage further. ‘Our project managers actually raise the invoices to send to clients,’ says Upton. ‘The financial controller checks that the details agree with the contract terms, but the responsibility for that invoice lies with the project manager. It’s part of how we assess their performance. As you can imagine, we have very little bad debt on our books.’
5. Understand your customers and the nature of their payment cycles
Many of your clients will have set dates in the month when they pay invoices, so it’s a good idea to incorporate that into your credit control system. ‘If you miss a customer’s cheque run you might have to wait another month and that directly affects your cash flow,’ says Upton. ‘Some customers we invoice weekly, some monthly, and that flexibility means we’re much more likely to receive payments on time.’
6. Invoice accurately
Research from PwC found that around 85 per cent of the reasons given for non-payment by business customers relate to invoice queries or poor administration.
When Michael Wilmshurst took over Nationwide Accident Repair, the amount of debt reaching 120 days since the due date totalled £1.6 million. Now he’s reduced that figure to £115,000 and he says it’s vital to get the basics right, such as invoicing the right amount and sending it to the right place. ‘You wouldn’t believe how many times invoices are sent to the wrong address,’ he exclaims.
A golden rule is to never send out invoices with the intention of making corrections afterwards. ‘If your invoices aren’t accurate, you might only discover this when you chase for payment, which could delay it for weeks, even months,’ says The Listening Company’s Upton.
7. Have a dedicated credit controller
PwC’s Roberts believes it’s vital to have a good credit controller. ‘You need to have people who are consistently involved in chasing debt, rather than just fitting it in on a Saturday morning as a number of business owners do.’
Many owners get involved in chasing debt from customers with whom they have a relationship, but that’s not always appropriate. Sometimes it’s better to have a clear division of responsibility and not wear two hats.
‘By all means call the client to gently warn them the debt recovery procedure has kicked in and see if you can prevent it going further,’ says Jeff Macklin from FDUK, ‘but leave the hardcore debt collection to a credit control rottweiler you hire specifically for the job.’
8. Use a third party to collect your debts
If all else fails and your cash flow is suffering as a result of large quantities of cash tied up as unpaid debt on your books, consider outsourcing the work to a collection agency. Although they have a mixed reputation, figures from the Credit Services Association (CSA) trade body indicate that its members recover up to £5 billion each year.
‘Don’t pick a collection agency randomly from the Yellow Pages. Only use one you know yourself or one recommended to you,’ advises Macklin.
A collection agency is advisable if you have a large number of customers who represent a small value of debt or are dealing across borders, as they will be aware of cultural differences and can often work outside normal office hours.
9. Only deal with customers who have a good credit history
It’s a good idea to credit check customers in advance and continue to monitor their payment practices throughout your business relationship. One way is to purchase status
reports from credit agencies. These include full customer details and financial results along with the payment experience of other suppliers, county court judgments and a recommended credit rating.
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