Why IS cash flow so important? Ultimately, it doesn’t matter how good your sales are if payments aren’t coming in quick enough. It’s a major factor in why businesses go bust because without enough cash coming in on time it’s increasingly difficult to pay bills or staff. And if people stop working with you or for you because they’re not being paid, business struggles quickly get worse.
Common cash flow problems
Cash flow problems can arise for a variety of reasons.
- Too much cash tied-up in work in progress (WIP)
Not billing for work that has been completed at relevant stages or milestones in the project means that all the risk and the cost sits within your business until everything is complete. That can seriously hurt cash flow, particularly for longer term projects or where significant investment in resources is required up front. - Lost invoices
If you send out paper invoices in the post, then you’re bound to have heard the excuse that your invoice has been ‘lost’. The larger the organisation, the more likely this will happen because they’re dealing with so many invoices. Losing invoices could also come down to poor accounting practices in your client’s business. It they don’t have the right people and processes in place then their payables will be a mess too. - Payment practices
It’s a sad fact that some industries are notorious for late payment. This can be for all manner of reasons including receivables and operational ‘norms’ which can make it a real headache to try to get paid on time. Some individual clients may also think it’s fine to just pay late and try to string it out for as long as possible. Without having tight payment procedures in place in your business, some clients will unfortunately take advantage of what is effectively free working capital. - Disputes
If there is disagreement over the quality of the product or service provided or the amount being charged, this can also mean your client will hold back on payment until it has been resolved. Many problems come down to human error – particularly when invoicing is manually processed. It is therefore important to get to the bottom of the issue as quickly as possible because the longer it goes on the longer it will take to be paid. Plus, it leads to frustrations on both sides.
8 cash flow improvement tips
One proven way to improve your business finances which doesn’t involve investment, new marketing techniques, or drastic cost cutting is simply to improve cash flow. Here’s how:
- Know your customer
Start each new relationship by asking the customer to complete a credit application. This puts the relationship on a formal footing from the outset and demonstrates that you take business seriously. Where the potential risk is high for your business, you may also wish to request a credit report on the customer from a credit reference agency (CRA). - State your payment terms
Make sure you receive a signed contract before sending out goods or carrying out services. Both your contract and credit application form should state your payment terms, as should your invoices. Payment terms usually include the latest point at which the customer needs to pay the invoice. - Set credit limits
If you’ve carried out credit checks and you’re sure the customer has the ability and the will to pay, it’s vital you set a credit limit. Look for accounting software that enables you to set credit limits and then sends an alert to your credit controller if the customer goes over that limit. - Get a Purchase Order (PO)
A lot of companies demand that supplier invoices quote a PO number – without one, payment may be delayed or refused. Having a PO also gives you a proof of claim should your customer go bust and you end up having to deal with an Insolvency Practitioner. - Set up automatic invoicing and reminders
Many firms have poor cash flow simply because of a lack of organisation and routine. This can lead to sending invoices late or at irregular intervals - which in turn leads to irregular and late payment. The key to solving this is using technology to automate your system so that invoices are sent out automatically and then followed up by reminders at set times. - Track invoices
Invoices often remain unpaid simply because people forget about them – and a forgotten invoice is an unpaid invoice. You can stop this by using technology to track the status of all your invoices so that you are clear about when they were issued, when reminders were sent and when they were paid. - Chase-up payment
Sending a reminder by post is less effective than calling about payment. In fact, a phone call is 80% more effective so put procedures in place to ensure those calls happen in a timely fashion. Good accounting software can make it simple to record the phone call and store it – providing excellent proof of what was agreed. - Move your whole accounting system online
All the above – and more – can be done by moving your system online. The key advantage is the ability to automate so much of your accounts operation so that it’s no longer a question of someone remembering to send out invoices, chase debtors or file records. Technology does it all for you, which not only boosts your cash flow but also frees up time for your accounting staff to do something more useful.
Access has a range of resources available to help make life easier for finance professionals in these challenging times. For more detailed information on how technology solutions can be used effectively to improve cash flow, see our finance and accounting software.