There is a saying that I use a lot with clients and startups and I am sure you might have heard it before:
"Sales are vanity & profit is sanity"
which basically means it doesn't matter how big your sales are, if you don't make any profit, give up!
I like to take it one step further "... and cash in the bank is king".
It does not matter how much profit you make, if it is only on paper, you will not be able to pay the bills. It is way to easy to bury your head in the sand, on the one hand, worrying about how you are pay staff or your suppliers, on the other, scared to phone your customers to ask for what is yours.
Cash flow is the lifeblood of a company, when it stops pumping you’re in serious trouble. But every minute you spent managing cash flow is another minute spent not making a sale or focusing on your core business – for small businesses this can be a difficult juggling act at the best of times. The ultimate goal for any business has to be making managing cash flow as easy as possible to make sure it gets paid without detracting from its purpose.
Here are five ways to make sure you’re on the right track:
Setting payment terms and keeping a tight lid on themIt starts when you sign your first contract, it’s very easy to get carried away and agree to unfavourable terms in order to get your business going or when signing up as a supplier to a big name. Large businesses will throw their weight around and demand long payment terms from their suppliers. The problem is that while you can get a boost from having a big name on your books you can also be waiting three months (or longer!) to get your hands on the cash.
If you can afford to take the hit on your immediate cash flow it could be worth it in the long run, but you need to make sure that your business can thrive, not just ‘survive’, in the meantime.
Accurate invoicingIt costs around £6.60 to process an invoice, in time and material costs, and a typical £14 to resolve an invoicing dispute. It seems like such a simple thing but no one is perfect and mistakes due to human error are inevitable even in the best run companies - and this all adds up. If you have a system in place to double check that invoices are complete and accurate (for example, up to date PO and reference numbers and clerical errors) it is possible to mitigate the cost of mistakes. When you consider that up to 40 per cent of paper invoices come into dispute, it is clear that the benefits of a little extra time spent fact checking here can save in the long run, not to mention the fact that you won’t get paid until the invoice is accepted (and maybe not for another 30 days after that!)
Identify your bottlenecksDo you have an issue with cash flow that keeps occurring? Is there a customer that is repeatedly late on their payments? These are systematic problems that you need to resolve. A poor payer can be put on shorter payment terms when contracts are renegotiated in order to force them to pay up earlier, shoring up your cash flow and preventing the culprit from using delaying tactics.
E-invoicing pips the postWith paper invoicing, data is taken from a computer system, printed onto paper, sent in the post, copied from paper to the recipient’s computer, processed and paid. That process takes days, assuming that there are no disputes which would require the process to start again. Paper invoicing is time consuming and wasteful.
One of the great advantages of e-invoicing, e.g. EDI, is that it ensures visibility. When you entrust invoices to the post they vanish until acknowledged by the customer – once they finally get round to opening it. It is impossible for invoices to get “lost in the post”, an excuse you almost undoubtedly have heard before, as you can see immediately that the invoice has been transferred – with a clear audit trail.
With an e-invoicing system, invoice data is sent directly to the recipient’s computer or, even better, their accounts system in a matter of minutes and can be accepted or rejected and resolved on the same day, with little to no material cost. The time and cost savings can be invaluable to speeding up cash flow. For a modern day business, operating with paper invoice system is akin to using carrier pigeon for communication.
Maintain good relationshipsIt might sound a bit obvious, but maintaining good relationships with other businesses can help massively in reducing the amount of time it takes to get paid (or, if need be, getting an extension on your own payments!). If the person in charge of finances likes you, the chances of your invoices finding their way to the top of the pile are that much greater. At the end of the day, doing business is essentially a social process.
In short, these are five very simple steps and processes that can help you more easily manage your cash flow, turning it into a controlled business process rather than a constant fire fight. Signing contracts without careful consideration, not spending time fact checking invoices and being dependent on time-intensive paper processes can have bigger implications on your business’ cash flow than you think.
The more efficient these practices, the faster you get paid.
If these fail, maybe you need to look at financing your invoices - more about that soon.