Cash flow is one of the single most important aspects of managing and growing a business. Indeed, recent research suggests that it’s the number one factor that affects businesses, with 82% of failures due to poor cash management. But what can you do to manage your business cashflow effectively?
Have a Cushion
First and foremost, it’s wise to have a comfortable cash buffer retained in your bank account at all times. While a business overdraft may serve the same purpose, physical cash in your bank account helps to weather temporary cashflow issues without needing to worry about interest payments.
Track & Forecast
The next obvious question of course is how large this cushion needs to be. The exact figure will vary from company to company, based on your unique situation such as outstanding credit and debt, stock liquidity and pre-agreed payment terms.
Having an experienced commercial accountant or finance director can be worth their weight in gold in such circumstances. Such an individual will allow you to accurately project future cash requirements, and plan ahead to ensure such funds are available as required.
Negotiate Payment Terms
The terms agreed with both creditors and debtors can have a significant impact on business cashflow. For example, extending the payment terms you pay to suppliers, while minimizing those of your own customer and clients can rapidly increase short-term cashflow.
On the other hand, factoring interest payments on overdue sums owed by debtors can also encourage rapid payment, as well as increasing the total cash influx when late payments are finally made to your company.
There is little point in your company struggling when you’re owed outstanding money that your clients simply aren’t paying.
Many modern invoicing applications make credit control easier, by allowing you to auto-generate reminders of outstanding monies owed. By regularly communicating with those companies who owe money you can gently encourage payment in a more timely manner, and prevent such situations occurring again in the future.
Factoring / Invoice Financing
Factoring and invoice financing are largely similar processes, the main difference being quite who manages the credit control process. These concepts allow you to “borrow” against outstanding invoices, rapidly producing cashflow for your business, even when a bill hasn’t yet been paid to you.
That said, be aware that there are of course costs associated with such a procedure, so while they can ease short-term cashflow, the total sums you receive may be less than the original invoice value.
As a final course of action, overdue debts can be passed onto a professional debt recovery organization. Such a company will seek to make personal contact with outstanding debtors and encourage payment for a fee. Many debt collection agencies operate on a “no win, no fee” basis, making it a low-risk opportunity. That said, as with factoring, be aware that a percentage of the monies recovered will become payable to the agency in question, to cover their costs.
Page Hawin works for Vilcol, an experienced tracing agent with global coverage.
Image Credit: Jayson Ignacio