Managing Your Cash Flow

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How to get your (financial) house in order

5 Mins

In a business that was started with a team of investors or partners, rigorous financial systems have to be introduced from day one. 

However, if you’re an owner manager, the importance of this discipline is probably not as obvious early in the life of the business. You had no-one to report to other than HMRC and yourself. If there was any fraud or mismanagement it was an internal issue. 

This will change when you bring in an investor, or start the due diligence needed before floating. You will need to prove to investors or the City that your business has stringent financial processes in place. You need to convince them that you run a business that controls the money flowing in and out of the company in a manner that is not open to abuse or fraud. 

The processes that investors want to see would benefit all businesses, whatever their size, so it is worth examining the four key areas now. 

1. Your Accounting System: What system do you use? Is it easy to understand? Are your books up- to-date and straightforward? Are there any dark holes? If you’re still using Excel (or even paper), consider introducing one of the many online software systems. It will save you hours of work and can cost you as little as £10 per month. 

2. Management of Payments to the Company: What is your invoicing process? What are your payment terms? Do you have bad debts? What processes do you have for avoiding bad debts? A customer is only a good customer if they pay on time. Too many businesses will let debt accumulate and are too embarrassed to chase. 

This can put a business at risk, will be unattractive to investors and devalue the company. Carry out a review of all your clients. Check you have contracts in place and the payment terms in each. How good are each of your clients at paying on time? If they’re often late, you should review their credit history, if poor, you should consider getting them to pay in advance. 

3. Management of Payments to Suppliers: How are payments authorised? How do you ensure that suppliers are not paid twice? Some unscrupulous businesses, or those with poor processes, will sometimes issue invoices more than once and find that businesses will pay twice. 

 A purchase order number system should prevent this. It is also the best way of managing the authorisation of payments. A PO Number can be as simple as an Excel spread sheet so should cost nothing to introduce. The cost will be in introducing the discipline of using it.

4. Management of Expenses: Do you risk giving staff credit cards that they can abuse? Or do you use a petty cash or reclaim system where you expect staff and your book keeper to manage hundreds of receipts? 

Investors are looking for transparency for the businesses (in where the money is spent) and a process that is not too burdensome but avoids fraud. Modern businesses now use prepaid cards as they limit the risk to the business but can be the least burdensome expense system to manage. 

Some pre-paid cards allow the business, or investor, to check online at any time what the money is being spent on. The money can also be taken out of the account in seconds if the employee leaves or is spending money inappropriately.  

Having reviewed this list, if you think your business would struggle to reach the required standards, it’s well worth making the changes now. The costs are tiny but the benefit to the business will be enormous.

Richard Wagner is CEO of Advanced Payment Solutions, which delivers Cashplus.

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