FD Insight: Advanced Cash-flow tips

September 24th 2014 | Posted by phil scott

It’s no secret to anyone working in finance that cash flow is crucial to the survival of a business, and so the ‘how to’ of keeping it in check is an often-discussed topic.

Invoice early, chase late payers and don’t spend beyond your means. These basic rules will set a solid foundation for any firm. But at the recent FD Recruit – FD & CFO Conference we asked delegates to go beyond the obvious and share advice garnered from years at the coalface: the tried and tested methods of those with a deep understanding.

We boiled down the discussion into five lesser-known but equally important tips to better business cash flow as put forward by some of the most successful finance directors in the UK.

Inspire early payment

Invoicing terms and deadlines are often built around the amount of time your company requires the money. And then it can be a spin of the roulette wheel whether the customer obliges.  Sure, you can send regular letters, pick up the phone and apply gentle pressure to the customer until they pay up. But imagine a situation where your customer wanted to pay early.

That’s the basis on which some firms introduce early repayment discounts, whereby customers can reduce their own bills by paying up before the due date.
Five per cent is often enough of a saving for a customer to make the extra effort. It’s also not usually a huge dent to your profit margin, and often comes out on top when you factor in resources saved chasing payment, and any interest lost or other financial consequences of poor cash  flow.

Make it easier to get paid

Except in the cases of rare vinyl LPs and certain watches, the easier it is to access a product or service, the more desirable it becomes. With this in mind, most companies and industries will expend a lot of effort simplifying the process of making a purchase – and in many cases that user experience ends here.
But that ignores the most important part – collecting payment. Some businesses are a pain to pay, and some are near impossible. Whether that’s staff answering the phones who aren’t trained to deal with such situations, a lack of instructions for customers, or a limited number of ways in which money can be transferred.
Make sure you can accept debit and credit card payments, even if that’s just online using a third party firm such as PayPal to handle the processing. Have a system in place to accept and process cheques, as old-fashioned as that may seem. Consider a Direct Debit setup.
It can be difficult enough to inspire a customer to want to pay – don’t add in further barriers once they’ve chosen to.

Manage your outgoings

Good cash flow policy involves keeping costs at a minimum by negotiating prices and reducing wasted purchases. Great cash flow policy is managing when purchases are paid for.
Some expenditure is non-negotiable, with the taxman top of the list. But whilst he’s not known for his sympathetic ear and propensity for flexible terms, your suppliers may be. Not everybody requires immediate full payment, some will accept payment plans, some don’t impose a penalty if you pay a little late.
In an ideal situation you’ll be able to pay all your bills right away. In reality, it can pay to look into whether payment can be delayed for the sake of keeping your cash flow healthy. Paying late where there’s a small penalty, and in doing so freeing up cash to settle another bill threatening a large penalty, can often be a better course of action than prioritising bills by their stated due date.

Match money in with money out

Business 101 says that when more money comes in than goes out over the course of a year, we get profit, and profit is good. But profit is only part of the picture, and if you don’t keep tabs on when money transfers in and out, you risk not making it to the year end.
Good cash flow management is about more than keeping costs down and getting prompt and regular payment. Really effective finance professionals will map out the level of money in reserve as it fluctuates throughout the year. A large cheque due in three months is not a reason to splash out now, especially if it means getting behind on your bills.
Draw up predictions of when you can reasonably expect money to come in, and don’t plan to spend money during any period that leaves the coffers empty.
Get this wrong and you risk late payment fines, unpaid staff, suppliers withholding goods, the electricity company cutting your supply…

Review regularly

An effective review of your cash flow does more than address what went wrong last time and how to do it better next time. That’s essential, but only the first step.
If you really want to nail your cash flow policy, spend just as long looking at what’s been going right, putting it under a microscope and asking whether these areas, too, can be improved.
By improving what you’re good at, not just what you’re bad at, you will find true efficiency and attain a fighting fit cash flow.