Your sales are booming and the money is coming in, but if you can’t pay your bills, this counts for nothing.
Cashflow management is the lifeblood of all growing businesses and the key indicator of your business’ health. It involves considerable planning – ensure you have all the necessary facts and figures to hand before embarking on any cashflow management plan.
Forecast your sales and expenses for each month over a 12-month period. Be conservative with your estimates but realistic too. Your cashflow accounting figures are bound to differ from the actual results, but this is all part and parcel of juggling your cashflow management. Forecasting sales is key – it will ensure you maintain a realistic business cashflow. It’s a delicate balancing act as conversely this is the area that is likely to experience the most ups and downs.
Need to know
Past performance figures are a good base on which to model your forecasts, especially if you have maintained a consistent sales and expenses cycle. Assess your sales in previous years, take into account any future changes you will make to your business’ focus, structure or headcount and study the market as a whole. For example, cash may be coming in more quickly than you planned – is this due to seasonal demand, or is this likely to be sustained on a regular basis? You should also assess the bad debt you have accrued, if any, and make decisions on how you plan to resolve it, either by writing off the debt or chasing harder.
The processes that you have in place to avoid accumulating more bad debt are something you should consider at this stage too. Set rules and include them in your payment terms and conditions. Set a credit limityou’re your company and abide by it. Typically, this will either be double the sales figure of a particular customer or a maximum credit sum you are comfortable for the company to be owed, such as 20% of your working capital. Apply a ‘risk rating’ to each customer for internal use too. This helps ensure you don’t have too many high risk or new customers accounting for a significant proportion of your revenues.
Communicating terms and conditions
Communicate it to suppliers, clients and your own staff and ensure your accounts department, finance director and/or bookkeeper have a system for following it rigidly. Any deviation from it will give licence to customers to take a mile and wriggle out of paying on time. Equally, your reputation is on the line when it comes to paying suppliers. It’s also worth noting that perennial bad debtors are named and shamed on the Better Payment Practice Campaign’s website at www.payontime.co.uk.
Make a point of credit checking new and even existing customers, although the Pareto Principle or 80/20 rule, whereby 80% of sales come from 20% of your customer base, should help you establish which businesses to prioritise for credit worthiness checks. Remember, situations change and if a company has failed to meet the terms of another supplier that supplier may have started legal action or winding-up proceedings. The Credit Services Association is the national body relating to the collection of debt and should offer a good starting point for locating professional services firms that can assist you. You can find more information at www.csa-uk.com.
• To improve your business cashflow, consider extending the time you take to pay your suppliers
• Use your cashflow accounting plan to predict times when you might need a further injection of cash and plan for this sooner rather than later
• Make cash reserves work harder – for example, an overdraft could finance your short-term business activities and give you some leeway if you are being held back by cashflow management issues
• Business Link (www.businesslink.gov.uk) and The Better Payment Practice Campaign offer further advice on financial planning and cashflow accounting.
If you hit a business cashflow problem, seek out specialist advice immediately – ignoring the problem won’t make it go away. This could be your existing accountant, investor or mentor – someone who will help your business get back on track. Insolvency practitioners are a last resort, but can help find solutions before it’s too late, such as company voluntary arrangements (CVA), which amounts to an agreement between you and your creditors to consolidate debts and repay them in part or full over an agreed timescale. Your unsecured liabilities (VAT, PAYE and creditors) are thrown into the same pot with a realistic repayment plan set with your cashflow forecast for the next two to four years in mind.