We’ve all heard that old adage “Cash is King” the origin of the phrase isn’t altogether clear, however, according to Wikipedia it was used by Pehr Gyllenhammer CEO of Swedish Car Group Volvo following the global stock market crash of 1987.
Whether you are a Sole Trader an SME or large corporate like Volvo when it comes to running your business one of the many challenges is managing the cash flow. Even a profitable business can fail by not generating a positive cash flow, I know that statement sounds crazy right, did I just say a profitable business can fail? So, what is cash flow? At its most fundamental level it is a company’s ability to continue to trade and this is determined by creating positive cash flows. It sounds obvious but cash is needed to pay suppliers, employee wages, debts to lenders and a certain amount will need to be available to reinvest in the business to ensure it moves forward. A positive cash flow, therefore, not only ensures a company can pay its debts as they become due, it allows for reinvestment in the business and can also return money to shareholders.
A recent report from Xero stated that 65% of business failures in the first five years of trading are blamed on financial issues, there are many tactics you can incorporate into your business model to combat this, stabilize the cash flow and grow your business. Whether you are a Sole Trader an SME or large corporate like Volvo when it comes to running your business one of the many challenges is managing the cash flow. Even a profitable business can fail by not generating a positive cash flow.
It's vitally important to continually review your business procedures to ensure your business is running efficiently. There are a few areas to look at here. Firstly, while it is wonderful to see high sales figures, it can prove stressful if payments for goods or services sold are made late, putting increased pressure on the business finances. During a recent meeting attended FSB, CBI, Xero and others, a call was made for a cultural change in the way businesses are paid citing that 50,000 small firms are put out of business every year, while a further 15% struggle to pay staff and other costs due to late payments.
The good news is that there are several things you can do as a business owner to help mitigate late payments.
Here is our seven steps of things you can do:
1. Do you need to use a Purchase Order Number on your invoices? In some cases, invoices will not be paid without one.
2. Invoice promptly, it sounds obvious, but a recent study found that 22% of businesses wait up to a month before sending invoices, the sooner you invoice the sooner you will be paid.
3. Keep a close eye on the time and materials used for a job and make sure your invoice reflects this. I suggest using a timer software like Toggl to ensure you invoice fully for your time. It is all too easy to forget how long you have worked on something, especially if it is a long-term project.
4. Establish clear payment terms with your customer and ensure these are on your invoice.
5. Make it easy for your customer to pay you, add your bank details to your invoice or better still a link to one of the many payment services like GoCardless, Stripe or PayPal.
6. Build relationships with the people who are handling your account, although there should be no favouritism, you may get paid a little quicker if you have built a rapport with the person who is going to pay your invoices.
7. Use proper accounting software, to ensure you can track who has paid you and who you need to chase.
If, after all of this you are still paid late as a last resort there is an act of parliament that will help when selling your goods or services to another business. The Late Payment of Commercial Debts (Interest) Act 1998 which was further amended in 2018 to allow representative bodies to challenge contractual terms where these are deemed to be grossly unfair is legislation that adds an implied term in business-to-business contracts allowing a fixed sum for costs plus interest that can be charged if another business is late paying for goods or a service.
This is referred to as ‘statutory interest’ – the rate allowed is 8% above the Bank of England base rate for business to business transactions. It is important to note that you can’t claim statutory interest if there’s a different rate of interest in a contract that you have in place with your customer so you will need to check this carefully before making any calculations. Take a look at our Fact Sheet which explains the formula for calculating interest on late payments and the admin fees that can also be added.
Another often overlooked in the strategy of a business is payments to suppliers. I have come across many businesses that don’t pay careful attention to this and in some cases have shorter terms with their creditors on the purchase of materials than they offer to their customers. Unless there is a significant amount of Capital in the business this will very quickly cause a negative cash flow. In the long term this could result in there not being enough cash in the business to purchase further materials to fulfil the orders received as well as paying staff and all the other overheads. There are a couple of things you can do here, firstly try and re-negotiate the terms with your suppliers, if this is not possible ask your customers for a deposit which will help with your cash flow.
If you don't feel confident in overseeing your cash inflow and outflow, you can always hire an Accountant and/or a Bookkeeper to do it for you. Regardless of who manages your cash flow, it needs to be done.
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