Tips For Cash Flow Management

1. Ensure you have good financial reporting

The first step to good?cash flow management?services 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.

2. Switch to online accounting software

Having a good digital?bookkeeping?system online can help have something more tangible to look at. As well as well financial reporting, handling your accounts online can help you get a better grip of your finances. When properly maintained,?online accounting software can provide you with real-time access to your key account balances and customer debts,?while allowing?you to keep an eye on overheads.

3. Know your taxes

Keep your tax affairs in order. First off, use cash accounting for VAT. By using cash accounting, which is available for businesses up to ￡1.6m turnovers, you only pay the VAT on monies you have collected in the quarter rather than what you have invoiced.?This way, you are not using your money to pay VAT on invoices that won’t be settled until sometime after the VAT quarter or even the payment date.

You should understand your business’s tax cycle and make provisions, as taxes can fall monthly, quarterly, and annually. So,?putting cash aside into deposit accounts to save towards VAT and corporation tax, for example, can take the stress away when the time comes to make the payment. The trick is not dipping into the pots before payments fall due – projections will help with this too by identifying where gaps may arise.

Finally, make use of those tax allowances. Whilst saving tax should not be the key driver, the timing of business decisions can impact when you get the associated tax benefit.

Make additional pension payments and asset purchases at the end of your financial year when you have a good idea of the outturn rather than just after which would delay the impact on the corporation tax liability by almost 12 months. Speak to your accountant about this and other tax reliefs?such as R&D tax credits?which might be available to your business.

4. Establish debt chasing procedures

Credit control and debt recovery are vital pillars of?good cash flow management services.

Debt can seriously compromise your business and late payments have become even worse during the pandemic. Last year,?the Credit Protection Association?reported that over half (54 percent) of businesses said they were waiting on late payments on invoices due to Covid-19. As high as?47 percent have seen revenues decline, with nine percent of businesses report that income was at least 50 percent lower than the previous year.

For any shape and size of organisation, the most important aspect of managing cash flow in terms of credit control is to have a clearly mapped out debt chasing procedure in place and to stick rigidly to this process.

However, the longer a debt remains unpaid, the harder it becomes to collect.

A good practice might look like having 30-day payment terms and having a reminder in place for day 26 or 27 to communicate with a customer to check everything is lined up for payment on time. This is all part of your customers’ experience so if positioned well, it will demonstrate that you are an organised and helpful business.

Ultimately, debt chasing is about maintaining a delicate balance in client relationships – keeping them happy while getting your money.

5. Have a dedicated credit controller

Late payment can put a significant strain on your working capital, so it’s important to have an efficient and effective credit control strategy in place to limit the damage it will have on your cash flow.

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.

This process should form part of your onboarding with customers or clients to set expectations from the outset, suggesting that somebody within your own organisation or outsourced should be assigned as having accountability for managing the procedure. This allows them to establish contact within your customers’ businesses and to build an ongoing working relationship.

Having these open lines of communication can make a huge difference in how your account will be prioritised when a purchase ledger clerk at a client organisation is dealing with payments. It helps to fully understand your customers’ payments processes from day one so you can work together effectively and manage prompt payments in line with any systems they have in place.’

6. 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 ￡5bn each year.

A collection agency is advisable if you have a large number of customers who represent a small value of the debtor are dealing across borders, as they will be aware of cultural differences and can often work outside normal office hours.

7. Invoice Accuracy / Send invoice on time

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, which directly affects your cash flow. Some customers we invoice weekly, some monthly, and that flexibility means we’re much more likely to receive payments on time.

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.

8. Cut costs and spread payments

Put simply, you can improve your cash flow by not purchasing items unless they are business-critical and you can spread the payment rather than taking a lump sum out of your cash flow. Hire purchase and leasing can be used to fund a range of items these days, including new and used cars, light commercial and heavy goods vehicles, plant and machinery, office furniture, and computer equipment.

9. Improve how you use bank accounts and overdrafts/loans

Bank overdrafts are a popular resource for plugging short-term gaps in cash flow, providing additional cash when needed, and enabling unforeseen costs to be dealt with rapidly. Ensure that the size of your overdraft limit suits your needs – too small won’t solve cash flow problems, too large may mean paying unnecessary fees.

Bank loans offer a flexible and usually cheaper alternative with a planned repayment schedule and lower interest rates. Some high street lenders will even advance a lump sum against future cash flow, instead of only against assets. Ideally, negotiate loan or overdraft facilities with your bank when you’re in a strong cash position, before you need them, as you’ll get a better deal.

Many banks now tailor loan repayments to match the cyclical nature of your business, even offering ‘payment holidays’.

Another useful process offered by some banks is what’s called ‘sweeping’. When current account funds are low you often don’t have time to wait for a transfer to top it up from your savings account, which may require a notice period. A solution is to set up an inward sweep from one to the other that is triggered when the current account balance falls below a specified value.

10. Use letters of credit for bank finance

A letter of credit allows a supplier to be paid straight away and the bank agrees to debit the business account at a fixed or determinable future date. Provided businesses don’t exceed their agreed limit on letters of credit and can provide guarantees, it can be a great help when managing cash flow.

11. Avoid overusing petty cash or corporate credit cards

The trouble with corporate credit cards is that unless people are incentivised to correctly allocate the costs to the client concerned, or inwardly to the business, you’ll struggle to have a true record of expenditure. If there’s a delay before allocations are made to clients, who are to be invoiced for those expenses, your business bears the cost in the meantime.

It isn’t sensible to rely on petty cash either. This is best reserved for smaller team lunches and reimbursing employees for buying items for the business.