‘Turnover is Vanity, Profit is Sanity, Cash is Reality’
The phrase “cash is king” is one that’s often bandied about, but never is its meaning more explicit than when managing cash flow. Many new businesses enthusiastically prepare business plans, showing forecasts of shiny revenue and profit margins for years to come – but fail within months because they don’t manage the day to day incomings and outgoings of cash. In those early days, wise businesses look at payment terms before profit margins, even if it means taking on smaller clients with slimmer profit margins.
From the outset there are some golden rules to follow:
1. Targets, targets, targets
Prepare and ruthlessly maintain your cash flow forecast. Use the technology at your disposal to update your forecast weekly on a software package of your choice – Excel works fine in the short term but the new breed of cloud-based packages offer smarter ways to track and manage your accounts, even when you’re out of the office. If you need help, find it or ask for it
2. Agree payment terms
Your cash flow will run away from you if you are expecting payment within 7 days and your client has a 30 day rule! If you are getting shorter payment terms from your suppliers than you’re giving to your customers you will soon be in trouble, that finance gap has to be closed.
Establish your payment terms in the opening stages of your client relationship. No cheques – they just cause unnecessary and totally avoidable delays. For on-going work, direct debits are great and give you peace of mind but for ad hoc or variably priced work ask for payment by electronic transfer – and make sure your bank details are clearly visible on your invoices along with the due date.
3. Prepare for all Eventualities
Consider putting measures in place to tide you over the lean times – invoice discounting and factoring are designed to help. Make a friend of your bank manager and keep him or her informed if difficulties are looming. Do you spend what you’ve got or save for future requirements? Keep VAT money in the VAT pot and don’t be tempted to spend it.
Only origami designers like paperwork but your invoices can’t be paid if you’ve not issued them! Set up templates that work for you so that all you need to do is complete the details and send them off. Number your invoices in a manner that has some meaning. If you need to chase it has to be clear what you are chasing.
5.Chase, chase, chase
Neglect unpaid or late invoices at your peril. Your core business is important but no cash means no business. Take the time to pick up the phone to remind a client of an overdue payment. Another chance to talk to your client might lead to more work – and the cash!
And remember to extend the same courtesy to your suppliers – they have their cash flow to manage too and will thank you for prompt payment! Paying promptly earns your business respect and may allow you to negotiate better deals or agree a prompt payment discount.