How to maintain relationships for better cash inflow management

 Craig Alexander Rattray is a Growth Strategist and Cash Flow Expert based in Glasgow, Scotland. He is the author of Mastering Cash Flow for Business Owners.

I’ve covered the difference between profit and cash, and managing cash outflows. All that’s left now is cash inflows and how to better manage them.

As highlighted in “The tips you need to manage cash outflow in the right way”, cash outflows are under our control as we decide when we make the payments from our bank account, and how much we pay.

But that’s not the case with cash inflows. 

The uncertainty of cash inflow

The timing and quantum of receipts from customers are at their discretion, just like our cash outflows are, and that means they’re more difficult to predict with the certainty of our outflows.

Remember, without the cash inflows, our ability to make cash outflows will be restricted.

This clearly makes cash inflows more difficult to manage and control. Credit terms and cash collection processes are a key part of good cash management.

The key in cash outflows is information, real-time data and ensuring we know what we owe, why we owe it and when it’s due.

Whilst we need that information too for cash inflows, it can be a bit more complicated. 

I believe the key to success for good cash inflow management is down to the relationship with the customer – an area that’s often neglected in terms of its importance. 

Building the right relationships   

There are many things we can do that will assist in improving the timing of cash receipts (more on this later). However, the personal relationship with a customer can have much more of an impact.

As the Finance Director (FD) or Chief Financial Officer (CFO) in difficult cash situations, my focus is always on paying the key suppliers first that are critical to continue trading and delivering our products and services. And similarly, those that are inclined to chase for payment are generally higher up on the payment list too.

It’s equally important to ensure that the operational team stays close to their day-to-day supplier contacts and highlights any cash and payment challenges that may spring up. That provision of knowledge, care, and making them aware of the situation, helps when there are issues with retaining supply.

If we approach that from the cash inflow perspective, we can use that insight to our benefit and adapt our approach accordingly.

Get to know the people: their family, their interests and other personal things that help build the relationship.

Established and well-developed relationships make customers think twice before making late payments.

If they only have limited funds left to pay suppliers and it’s between your business and another where there is no relationship, in most cases you’ll be paid. 

Steps to take to improve business relationships

There’s a lot more that I could expand on here, but it’s important to highlight some other key tips to improve cash inflows;

Speed up your invoice processing  

Invoice when the work is done, services are provided, or products delivered. Ideally daily.

This includes good administration. Ensure all invoices have the correct details, like company name, address, the receiver, what work or service was provided, to avoid unnecessary delays. 

My preference is for invoices to be sent electronically.

Provide clear credit terms, due dates and credit control policy

Credit terms and due dates should always be confirmed in writing and included on all invoices. 

Ideally use a standard credit application form, with detailed trading terms, and credit check the potential customer too. Perhaps ask why they left their previous supplier and even make a call if there are concerns.

It’s also important to follow a clearly defined credit control policy. What is your debt collection process – dates, timings, actions? Are the finance and operational teams aware of the contents of the policy? What are the escalation procedures for overdues or over credit limit?  

It’s good practice to put all of this in place.

Review outstanding trade receivables and trade debtors schedules 

Both should be reviewed weekly and if you have a dedicated person, they should be chasing and reminding customers daily.  

Typically, the aged debtors schedule is analysed in columns showing current, 30 days, 60 days, 90 days, 120 days and 120+ days. I aim to ensure there are no outstanding items in the end four columns, unless there are specific reasons for your company to offer extended credit terms.

There should be detailed actions for all individual invoices outwith the first two columns.

Make it easy to be paid

Online and electronic payments should be the standard method of receipt.

It avoids delays and awaiting cheques clearing. You should be able to accept multiple payment methods including credit card and solutions, like Stripe and PayPal.

There are other things that can be done to improve timings of receipts like direct debit/automatic payments, taking deposits, incentivising early payment and various others.

Credit control and trade debtor/receivables management should be a regular routine for all businesses.

Remember, in my view, a sale is not a sale until the cash is in your bank account — focus on that and you’ll definitely improve your cash inflows.

This article first appeared on Pleo "The Future of Finance on 10 June 2021 https://blog.pleo.io/en/cash-inflow/