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Practical steps for managing cash flow

We’ve looked at why managing cash flow is so important to a business. Now it’s time to review some of the practical actions that businesses can take to help improve cash flow.

Receipts for customers

There are some vital steps that all businesses should take to maximise receipts from customers:

  • For big value sales, credit check the customer’s credit rating
  • Agree the terms that the customer will pay on before starting work
  • Invoice as soon as the goods have reached the customer or service has been rendered
  • Regularly progress payment with the customer starting after a few days
  • If payment hasn’t been received within the agreed period, progress higher up the customer’s management and consider how quickly you stop supplies or services
  • If still unpaid, use solicitors’ letters and threaten court proceedings
  • If still not paid, consider whether it’s worth going to court, or are you just throwing good money after bad

Payments to suppliers

  • Agree payments terns with suppliers at the start of trading with them and always try to stick to them
  • If you think it may not be possible to pay, contact the suppliers concerned and ask for more time. Provided you consistently pay on time, and requests to defer payment are rare, they will probably agree, to delay payment
  • Letting suppliers down will reflect in your credit rating, which may come back to affect future supplies 

Managing cash flow is in part a mirror image of the businesses investment in working capital. Generally, the higher the value of stock or work-in-progress, or monies owed by debtors, the greater the difficulty in keeping control of cash flow. So maintaining a tight grip on stocks and debtors should free up cash for use elsewhere in the business.

Capital Expenditure

Decisions to invest in capital equipment such as computers, equipment or motor cars should be scrutinised carefully. The acid test is, can the money be more profitably used elsewhere If the new asset is essential to the business, think about deferring payment by hire purchase, leasing or hiring. Also consider the tax perspective: if you have been making losses, leasing or hiring might be preferable.

Despite signs of recovery in the UK economy, the outlook remains uncertain. Businesses will be wise to keep their current and future cash position firmly in mind.

Know you current cash situation

You should always know how much cash the business has to draw upon, and what the position will be in three months’ time.

Regularly prepare and update cash flow forecasts

You absolutely need to know the effect of a lost sale or a bad debt on your cash position.

Raise awareness about cash

Make it clear to colleagues and employees how important it is to know when customers are expected to pay, and go through aged debtor schedules to make sure delinquent customers are chased up. Assign actions to staff and check they happen.

Think about your credit rating

Paying suppliers when agreed can help improve your credit rating. Preparing monthly management accounts and sharing the information with your bank or the credit reference agencies might also help your credit score.

Consider factoring or invoice discounting

Factoring or invoice discounting can offer financing for up to 90 per cent of the value of an invoice. This is likely to be much more than on an overdraft. They do require a more disciplined approach to credit checking, and only business-to business-invoices can be covered.

A bank loan or overdraft

If you decide on a bank loan or overdraft, you may be asked for personal guarantees or asked for security. Be aware of the interest rate and charges to be paid as well as any covenants with the finance.

Clive Lewis is head of enterprise at the Institute of Chartered Accountants in England and Wales (ICAEW).

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