January is a grim month for many businesses tipping them into suffering cash flow problems. On the one hand, there’s a VAT payment to be made at the end of December. On the other, clients will have shut down their accounts departments over the Christmas period, meaning that payments can be later than ever. This double whammy can push the cash flow of even the most carefully run business over the edge.
Why cash flow really counts.
There’s a saying that cash is king – and cash flow problems can prove a royal pain in the neck for any company. Without ready access to cash, you cannot pay your people and your bills, invest in growth, purchase stock, or do any of the things you need to survive and prosper.
One of the most common causes of cash flow problems is late payments. Even if you have excellent relationships with your customers, there are bound to be occasions when they are slow to pay – whether it’s a change of personnel in the accounts team, the implementation of new software, or simply a cash flow blip at their end. However, forewarned is forearmed, and there are ways to protect yourself.
Get the right software.
Calculating your cash flow used to be a complicated procedure. Not any more. Dedicated online tools and software make it easy to project your income and expenditure, and take remedial action before any cash flow problems occur. Getting the right software is the first step to solving your cash flow issues, enabling you to identify those customers likely to pay late, estimate due dates for your own invoices, and track your cash reserves.
Change your payment procedures.
Changing your business processes can have a huge impact on your cash flow. For a start, if you’re not invoicing quickly, that needs to change. Invoices should be sent the moment jobs are completed or on the last day of the month if you invoice customers that way. Every day you delay invoicing could delay your payment.
You should also examine your terms of business carefully. One size does not fit all, and you may find that some customers are amenable to paying faster or even making partial payments in advance. To speed the process, you could consider introducing incentives for quick payment. Typically businesses threaten to impose a penalty for payments made after 30 days, but you could instead offer a slight discount for payments within five. Some companies have found that arranging competitions for the fastest payer, with an attractive prize for the winner, has transformed the way their customers approach payment.
Finally, be as flexible as possible about payment methods. Some companies will favour payment via cheque; others will prefer BACS, PayPal or even wire transfer. Money is money, and allowing recalcitrant payers to choose the payment method that suits them best can transform their behaviour and eliminate the possibility of suffering cash flow problems.
Revolutionise your cash flow with an alternative lender.
If the above recommendations don’t give your cash flow the shot in the arm it needs, an alternative lender can. If you hit a sudden crisis, an emergency loan can give you cash inside 24 hours, enabling you to meet your commitments instantly. Alternatively, asset-based finance – whereby you borrow against the value of your existing premises, plant and equipment – can provide longer-term loans without all the hassle and paperwork of applying to a bank.
However, the definitive way to deal with cash flow problems caused by late payers is invoice factoring and discounting. In simple terms, these innovative solutions allow you to borrow against the value of your invoices as soon as you issue them – another good incentive to do things quickly.
You can typically borrow up to 85% of the value of your invoices, and will repay the loan, interest and charges when your customers pay you. With invoice discounting, you retain control of your debtor ledger and pursue your own customers for payment, whereas with factoring the finance company takes over the responsibility and assigns a team of credit control professionals to ensure early payment and minimise the interest charges.
Carl Faulds is a business recovery specialist. As managing director of Cashsolv, he offers advice and support to overcome cash flow problems and identify possible underlying problems that can be addressed to ensure a positive future for your business. Carl was former president of the Insolvency Practitioners Association, and makes regular appearances on BBC documentaries related to business recovery. Follow him on Twitter @Cashsolv.