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Anita Brook on keeping cash flowing in the right direction Cashflow or lack of it, is often an issue for small businesses. Many will suffer money troubles at some point or another, which in the worst case scenario can result in bankruptcy. Even if things are going well, complacency should not be an option for any thriving enterprise and by taking steps now, financial disaster can be safeguarded against. Anita Brook, founder of Accounts Assist gives her tips on how to keep cash flowing in the right direction.
Step 1: Cashflow direction
In the good times more money should be flowing into your business than out. Instead of giving yourself a hefty pay rise, put these extra funds aside for less buoyant times, or for when you want to expand. The bank will also be more inclined to lend to companies with a healthy bank balance.
To speed up the influx of cash (and slow down the outflows), pay suppliers on time, but at the end of the month, preferably when you’ve been paid yourself. Don’t let your employees, lenders and the taxman wait however and never default on fixed payments - this may have a detrimental effect on your credit rating.
Step 2: Prompt invoicing
Don’t stockpile invoices until the end of the month, send them out as soon as a job is complete. This should encourage a constant and steady stream of funds.
Step 3: Lay down the law
If you’re invoicing, you make the rules. Terms and conditions should be clear and acknowledged by your customers. The law sets a default of between 30 and 60 days for invoice payments, depending on the industry, but this doesn’t mean you can’t adjust these timeframes. As long as you draw up a written agreement that your customers are aware of, shorter payment periods can be agreed.
Step 4: Request a deposit
A deposit provides a safety net, particularly in the early stages of a business relationship, minimising the risk of no payment at all. With high value jobs, including bought-in costs paid for by your company, asking for a percentage of the job upfront is an imperative step to maintaining positive cash flow. For lengthy projects consider putting in place stage payments, to prevent being stung at the end. This should also be of benefit to your client’s cashflow.
Step 5: Send in the heavies
Well maybe not the heavies, but if you’re waiting for payment outside of the terms of your agreement then it’s late and you should take steps to get this sorted. Don’t be rash and jump on the phone to your solicitor, talk to the offending party first – it may be that they’ve simply forgotten. If they are having money troubles, try to come to an arrangement where funds are paid back in instalments.
You are within your rights to charge interest on late payments. The rate can either be included in your T’s & C’s, or based on the Reference Rate, which is valid for six-months. The Reference Rate is the Bank of England’s base rate plus 8%.
Depending on the nature of your business, prompt payment can be incentivised by offering discounts, or some other benefit, for people that pay on time.
Step 6: Take out a loan
Rather than creating a big hole in your funds due to a temporary cashflow problem, consider borrowing to cover a short-term deficit. Don’t rely on loans however - only borrow what you know your business can pay back.
Anita Brook is director of chartered certified accountancy firm Accounts Assist.
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