Just because a company is bringing in cash does not mean it is making a profit (and vice versa).
It is therefore important to take note of the distinction between being profitable and having positive cash flow transactions.
No business can survive in the long run without generating positive cash flow.
To have a positive cash flow, the company’s long-term cash inflows need to exceed its long-term cash outflows.
Here are a few top tips to consider regarding cash flow:
Make the ordering process as quick and simple as possible for customers. Allow them to place an order by any means they want, including by telephone and over the Internet.
Avoid doing significant amounts of speculative pre-sales work.
Avoid doing business with slow-paying or non-paying customers from the start.
Do not hesitate to turn down an order that might put too much pressure on the business’s cash flow.
Ensure the specification for every order is clear, to avoid later disputes. Sort out any problems with an order before it becomes a disputed invoice.
Avoid sloppy transaction processing, as disputes or part deliveries will delay payment.
Ask for deposits for large orders to fund purchase of materials. Seek advance and stage payments for any major work or bill weekly and ask for payment in seven days.
The payment process does not start until the invoice has been issued, so there should be no excuse for not sending out the invoice on the same day that goods are dispatched or services delivered.
Do not hesitate to invoice for any additional work requested that is outside the scope of the original order.
Offer customers a small discount for early payment of invoices.
Sales commissions should always be paid on the basis of cash received, not orders taken. This will encourage sales staff to get customers to pay promptly and avoid slow payers.
Do not be afraid that chasing cash will upset the customer. Be polite and professional and avoid emotion.
If you are told that the cheque is in the post, ask for the cheque number and the date it was posted.
Maintain a “stop list” of customers to whom you will not give credit, keep it up to date and circulate it to appropriate employees to prevent further credit being given.
Compare your average debtor days with similar companies in your industry. Set targets for reduction.
Have a robust cost control system, preferably using a purchase order system. This requires staff to seek approval before committing the company. Once the invoice arrives, there is little the business can do other than pay it.
Reduce inventory, which ties up cash and earns no direct revenue. Try to reduce both the range of items held and the amount of each item in stock. Suppliers can often deliver more frequently in smaller quantities. The more quickly a supplier can deliver after the order, the less stock is needed. Identify peaks and troughs and plan for them.
Dispose of old or obsolete stock. Review the product range to see if it can be consolidated to reduce finished inventory.
Cut costs by reviewing expenditure for the last few months. All expenses that can be cut will increase cash flow, but it takes sacrifice and discipline.
Consider consolidating suppliers, so that fewer of them get more business. This will make it possible to negotiate better prices. It will also enable blanket orders to be set up for supply of particular items at a set price for a set period. Staff can call off quantities against it, saving administration.
Sell assets and equipment that are little used to release cash.
Investigate the availability of grants, so as to reduce the capital costs that need to be financed.
Bank interest calculations and transaction charges should be checked, to avoid overcharging.
Do not take on new commitments, such as employees or equipment, unless the cash flow forecast shows that the business can finance it.
Do not become dependent on one or more large clients, as losing them could jeopardise the business.
Transfer any surplus funds to deposit accounts on a temporary basis.
Make use of technology
Use Internet banking to reduce charges and give more control over bank accounts.
Pay bills electronically to reduce charges from the bank.