How much are your invoices helping or hindering your business?
No matter how successful your company is, if your invoices aren’t being paid there will always be fires to fight. We explain how to identify and deal with common cash flow problems
Source: Close Brothers Business Barometer survey, March 2015
Cash flow is the lifeblood of a business. Regardless of how successful a firm is in finding new customers and making sales, if money is not coming in quickly enough to cover suppliers’ bills and staff wages, it is likely to spell disaster. It is no surprise then that late payment of invoices is one of the biggest concerns among SMEs (small and medium-sized enterprises), and an issue that small-business organisations constantly campaign about.
Earlier this year, the Federation of Small Businesses (FSB) called on the government to set up a formal inquiry into what it described as the UK’s “poor payment culture”.
The FSB highlighted the frequently poor treatment of smaller companies by larger organisations. Regional chairman Graham Buck said: “The FSB is calling for a wide-ranging inquiry to address late payment and supply-chain bullying at the same time.
“The abuse of small firms in their dealings with bigger businesses cannot be allowed to continue. The gradual creep of payment terms from 30 to well over 100 days in some cases, coupled with debilitating contract terms, can have a disastrous effect on a small firm's ability to operate.” Late payment of invoices isn’t the only potential problem: your firm’s cash flow position can also be affected if your business is growing too quickly. For example, if a significant amount of money is being spent on exploiting new markets there is likely to be a delay before any income generated by new customers appears in your bank account.
Whatever the source of cash flow issues, there are a number of steps a business can take to head off or mitigate the impact of late payments.
Put yourself in the picture
The first step to dealing with potential cash flow challenges is to get a thorough understanding of where your business stands when it comes to income and expenditure.
Drawing up a cash flow forecast helps you identify what money is due to come into your business and when, as well as what expenditure you will have to make over the coming six or 12 months, say.
This kind of forecast should indicate potential areas of vulnerability – for example, it could show that if a major customer were to pay their next invoice a week or two late, you may be left unable to cover your next payroll bill. Make sure you review your cash flow forecast on a regular basis as your business grows and as trading conditions change.
Take control of your finances
Sending out invoices promptly, chasing up late payments and cashing cheques as soon as they come in can all improve your firm’s cash flow.
Make sure you keep a record of which customers pay on time and which don’t, and base future trading decisions on this information if possible. You could also consider offering a discount if customers pay early, or imposing interest charges on those who pay late.
Seek outside help
Much of the uncertainty related to late payment can be removed by using an arrangement called invoice finance.
One type of invoice financing is invoice discounting, where a third party confidentially lends you anywhere up to 90% of the value of your outstanding invoices. An alternative form of invoice finance is factoring which works in exactly the same way as invoice discounting, but where the lender will then collect payments from customers on your behalf.
When it comes to ensuring the survival and success of your firm, it is vital to anticipate problems and deal with issues before they have a chance to develop into serious threats.
That’s why keeping on top of your company’s cash flow situation is perhaps the most crucial part of running a business. Download our eGuide, 6 ways to ensure you get paid on time for more information.
