Tracy Ewen, MD of Independent Growth Finance, gives her expert opinion:
“It is essential to plan everything. You must prepare cash flow projections for next year, next quarter and, if you’re on shaky ground, next week. An accurate cash cash flow projection can alert you to trouble well before it strikes.
"The key to managing cash shortfalls is to become aware of the problem as early and as accurately as possible. Financial services providers are wary of borrowers who have to have money today. They’d much prefer lending to you before you need it, preferably months before. When the reason you are caught short is that you failed to plan, a provider is not going to be as interested in helping you out.
"Cash flow problems can often be self-inflicted. Companies which send out incorrect invoices often find that their customers end up returning an invoice and requesting a new one. Make sure all your invoices are correct before they’re sent out to ensure your customers have no excuse for not paying.
"Make sure you have a strong process for chasing up your invoices. If your customer base is growing this is going to become absolutely vital. Often businesses do not have a formal credit control function/credit controller to chase up overdue invoices and so the task is left to staff who probably do not have the time, experience or motivation to prioritise the job.
"Balancing credit terms vs cash flow needs is something many businesses struggle with. Be sure to tell your potential customers upfront about your credit terms – before you provide your product or service. To improve your cash flow position, you can be more stringent in your credit and terms, requiring more customers to pay cash for their purchases.
"Try to look out for bad debt. Bad debt is defined as accounts receivable that will likely remain uncollectable and will be written off. Bad debts appear as an expense on the company’s income statement, thus reducing net income. It is almost impossible to avoid incurring any bad debt, but the more you can anticipate its likelihood and mitigate bad debt risks, the more profitable you will be. Be especially vigilant about having all your eggs in one basket – if a debt is growing to a size where it could seriously impact your cash flow, or if a major customer is consistently not paying on time, you need to address the issue urgently.
"If you’re a new startup you must try to get to know your customers. Some of your customers will pay on time every time while others will be perennial late payers. Speak to their finance teams regularly. Credit-check them before you agree to provide them with credit. The more information you have about the customer, the easier your payment collection process will be.
"Don’t always associate higher sales with better cash flow. If large portions of your sales are made on credit, when sales increase, your accounts receivable increase, not your cash. Meanwhile, inventory is depleted and must be replaced. Because receivables usually will not be collected until 30 days after sales, a substantial increase in sales can quickly deplete your cash reserves.
"Finally, consider using an invoice finance provider. These are commercial finance companies that can pay you today for invoices you may not otherwise be able to collect on for weeks or months. You’ll eliminate the hassle of collecting and be able to fund current operations without borrowing against your house."