Regardless of year-end profit and loss sheets, poor month-to-month cashflow management has the potential to cause serious problems for your business.
Insufficient cashflow has been found to be among the top 3 most common causes of business failure by the SBA, Harvard Business Review, and Business Now Magazine.
In this article, we’ve put together 7 simple tips designed to help you improve cashflow in your business.
1. Proper cashflow forecasting
DID YOU KNOW?: More than 90% of companies across the EMEA region don’t have a transparent view of their cashflow.
Can you imagine flying a plane and completely ignoring the fuel gauge? It seems absurd but that’s essentially the situation a vast number of businesses find themselves in when it comes to cashflow.
A proper forecast needn’t be overly complicated – it can actually be fairly easy to put together. Take a look at this FreeAgent article as a good starting point for creating a simple but effective cashflow forecast.
A proper forecast will help you set appropriate sales targets, manage costs, and support strategic decisions related to product diversification, recruitment, financing options and more.
2. Collecting receivables faster
DID YOU KNOW: Atradius research suggests that 95% of companies have experienced late invoice payment in the last year – impacting nearly 50% of total business receivables.
In basic terms, one of the best ways to improve your cashflow is simply to ‘get paid faster.’ Cash that’s already owed to you is almost certainly the lowest hanging fruit.
While, in an ideal world, you could look to eliminate customer credit altogether, the truth is that this can be a real deal-breaker and is likely to push your customers towards your competitors who do provide credit options.
Instead, look to shorten your credit terms where possible. Request initial deposits to reduce the total amount owed. Generate invoices more quickly, and follow them with a phonecall or email to ensure they’re received and on your clients’ radar.
The ‘carrot and stick’ approach is definitely a good idea. Provide incentives and discounts for early payments, and apply penalties in the form of interest charges for late payments.
If you’re struggling with collecting your receivables, outsourcing to a specialist collections company is often a good (and cost effective) option.
The longer invoices are unpaid, the less likely you are to receive payment – so act consistently and decisively.
3. Delaying cash outflows while strengthening supply chains
Of course, whilst you’re keen to get money into your business quickly, it’s just as important to hold onto that cash for as long as you can. But, of course, you want to make sure that you do not adversely affect the cashflow of key suppliers and consequently the health of your supply chain.
One creative way for corporates to tick all these boxes is the use of reverse factoring (also called Supply Chain Finance). This is where a financial institution early pays your suppliers on your behalf, deducting a credit fee which is based on your strong credit rating – ensuring your suppliers are not waiting for their money and giving them access to cost-effective finance.
Reverse factoring allows you to pay back the financial institution at a mutually agreed, later date – delaying your cash outflows.
A funded dynamic discounting programme works in approximately the same way as reverse factoring, but involves the negotiation of early payment discounts with your suppliers. A financial institution early pays your invoices, at a discounted rate of, say, 3%, and charges, for example, 1% of the invoice value as their fee. This means that your suppliers are paid early, your cash outflow is delayed, and you can – in this example – improve your operating margins by 2%.
4. Tightening credit controls
We’ve already touched on the fact that providing some form of credit is essential for most businesses. But that doesn’t mean you should offer credit terms unquestioningly to every client. It’s important to be diligent in ensuring that the credit terms you offer (both maximum credit and payment terms) are appropriate to each customer.
Customer references and regular credit reports should be used to limit your late payment or non-payment risk. Analyzing credit risk, and actively managing potential problem accounts, should be a daily activity.
5. Reviewing price strategy
A good pricing strategy is key for all businesses. As Warren Buffet famously said, “The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10%, then you’ve got a terrible business.”
Despite this, pricing is simply not a priority in most businesses. According to MITSloan Management Review: less than 5% of Fortune 500 companies have a full-time function dedicated to pricing; fewer than 15% of companies do systematic research on this subject; and, only 9% of business schools teach pricing.
The uncertainties in current economic environment have inhibited many businesses from seriously revisiting their pricing strategy. Now is the time to do so, using outside expertise if necessary.
6. Taking advantage of tax planning opportunities
From ensuring you have the right legal structure, to ensuring the optimum structure of contractual relationships and the appropriate utilization of tax allowances and reliefs – there are always options for limiting your tax bill and retaining more money in your business.
Three factors are key to your success in this area:
1. Good professional advice – if you are serious about limiting your tax exposure, it is essential to engage the support of specialist tax advisors and/or accountants with strong experience of your business sector.
2. Bring consideration of tax implications into all major strategic and operational decisions.
3. Advanced planning – if you’re worrying about this when it’s time to finalise your annual accounts, you’re too late.
7. Motivating and engaging your team
At the front line of maximising cashflow, will be your team – and it’s important to give them clear focus and direction. Analisa DeHaro, an associate principal with REL, recently told Inc. that cashflow needs to be a companywide priority.
“If employees have a target, that’s what they focus on,” she says. “Make sure management teams support working capital objectives.”
Healthy cashflow is the lifeblood of any successful business and improving your situation requires real strategic thought and concerted action.
If you don’t already know where you can achieve the best cashflow improvements in your business, now is the time to start!
Gii Finance is a trade finance network which links businesses with competitive funding sources. We have a range of products that can help business buyers and suppliers improve their cashflow and optimize working capital. If you’d like to discuss how we can help your business, please call us on +44 (0) 2037952594 or email us at firstname.lastname@example.org.