Tax & admin 8 September 2016

How to keep your cash flow positive

Money and cacl
No one customer should owe your firm more than 50 per cent of your sales ledger

Head of alternative funding platform Nucleus, Chirag Shah, gives his top tips for small business owners looking to thrive as well as survive in current economic uncertainty by ensuring they never run out of cash.

The UK’s small businesses are continually challenged by access to finance. Banks are increasingly tightening their belts as the economy navigates out of the recent vote to leave the EU, and overdraft facilities are being withdrawn at a moment’s notice.

At a time when business owners need financial help most, available capital is seemingly at its most limited. To not just survive the current economic uncertainty but also grow as a business, companies need to have disciplined cash flow systems and processes in place.

Credit control

Without a robust credit management system, outstanding customer invoices are often left to pile up until the last minute. Overdue debt needs to be monitored closely and recovered swiftly or it could ruin a small business.

It’s not difficult to do – following a proper process for outbound credit communication, for example, can mitigate risk with just a standard monthly statement and letter. Should payment still not be forthcoming, use your company’s leverage and refuse any further business until the debt is cleared.

Don’t supply customers with goods and services when they owe you money, it sets a dangerous precedent that could threaten the survival of your young firm.

Diversify your ledger

 In our experience, most small firms have one or two big customers.  Typically speaking, the smaller the business then the more concentrated the ledger.

Regardless of the actual size of your business, no one customer should owe you more than 50 per cent of its sales ledger. It’s absolutely vital that you service current clients and develop new ones at equal measures. Essentially, you want to protect your company from a major customer fallout – all it takes is one payment dispute to cause serious working capital problems.

Spreading your ledger also puts you in a better position to receive funding. A lack of diversification requires more complicated financial assistance and banks are less likely to take on the risk – and if they do, payment terms will often be more expensive. This increased cost and lack of flexibility can negatively impact your long-term growth plans.

Tighten up your credit terms

It doesn’t pay to have lax payment terms. Smaller businesses with limited capital rely on prompt payment to cover monthly overheads and the standard 90/120 day payment terms are not always viable options. We have even seen some companies getting paid twice a year with major customers on 150 day payment terms.

You’re not a bank, so avoid acting like one. Rather, be clever and negotiate credit terms that best support your business’ growth and survival. These ideas might help:

(1) If you’re doing business with a large company, it’s worth checking to see if it has a supplier finance scheme in place. If it does, agree to it and you’ll receive payment usually within 14 days of issuing an invoice. There is a fee for this prompt payment service – make sure you understand exactly what it is and include it in your invoice total so that you don’t earn less for being paid on time.

(2) When faced with lengthy payment terms, offer your customer a discount for paying early. If they refuse, factor in the fee an invoice finance company will charge you for covering the shortfall into the total invoice amount.  

Consider your finance options

There are many competitive products available that are worth looking at should banks refuse you financial assistance. Either way, when entering into a contract with a traditional institution or an alternative finance company, always read the small print. Hidden fees are often buried deep in the fine print and not all lenders are upfront about these extra costs.

A one-off admin fee, for example, is very common and will cost you somewhere between 1 per cent to 10 per cent of your total loan. It’s called an arrangement fee and is charged at the start of your contract, which can be an unpleasant surprise if you’re not aware of it.

The take-on fee is another commonly hidden cost and covers invoice finance charges at up to 2 per cent of the total invoice value. The amounts may seem small in writing but they can add up fast, impacting budgetary forecasts with unexpected increases to your capital and operational expenditure.

Manage your cash properly

Identify tier-two suppliers and negotiate longer payment terms with them so that you can keep more cash in the bank. Essentially, this allows you to recover debt from your customers without getting into debt with your suppliers.

To do this effectively you need a proper account management system that forecasts cash-flow, highlights aged creditors and prioritises key suppliers and payments.

With your accounts in order you’ll enjoy the added benefits of earning higher levels of trade credit and better loan approval rates.

Chirag Shah is CEO at Nucleus Commercial Finance

Find out how this London-based sole trader uses mobile payments to manage cash flow.  

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