Maximise your cash flow

You may have heard the saying “cash is king” and it is a harsh reality that cash flow difficulties are often the death knell for businesses of all sizes.

So what can you do to reduce the likelihood of cash flow problems impacting your own business?  This article focuses on cash inflows – in other words the money you get from your customers.  Following these simple steps will help avoid problems in turning your hard work into much needed funds.

Before you start work

A lot of issues can be avoided with some upfront planning:

  • Agree your billing schedule when you agree the contract – don’t just focus on the price, make sure you set expectations and agree in writing when you will raise your invoices and also what credit terms you are making available:
    • If you are doing a large piece of work, covering several months, agree a billing schedule that allows for regular stage payments towards the overall value of the work – don’t get left billing everything on completion.
    • If you need to purchase materials as part of the work, make sure your billing schedule reflects this – both in terms of size and timing, and equally importantly mirroring the credit terms you have with your suppliers.
  • Understand your customer’s processes for paying invoices:
    • Do you need to quote a purchase order number?
    • Must invoices be sent to a specific address (postal or email) and/or in a specific format?  It’s often the case that larger customers have centralised accounts payable functions through which all invoices must pass (and they will pass out invoices for approval to your contact).  If your contact wants a copy of the invoice, that’s fine but make sure you follow the supplier’s process as well.
  • Do background checks on new customers – credit checks can be worth the cost if they avoid you doing business with organisations with a history of poor payment behaviour or cash flow problems.  If you do discover issues, discuss these with your customer and if you still want to do business with them, consider asking for payment upfront or limit your credit terms.  If a customer is an unknown quantity to you, these may be useful steps on your first pieces of work with them, until you know how well they pay their invoices.
  • Build good relationships – any help you might need later, or tough conversations you might need to have will be easier if you do this.
  • Consider technology that will aid you getting paid – there are solutions available that commit the customer to direct debit payments, which can be really useful if you collect regular payments for subscriptions or similar fees.

As you do the work

  • Keep talking to your customer to make sure you are aware of any issues they have with your work, as these will impact on you getting paid.
  • Make sure you raise and send invoices at the agreed points in time.
  • Make sure your invoices are easy to understand and contain all the information needed both for the customer and also the law (such as VAT numbers and information if you charge this).  If you can send via email this will reduce delays in customers receiving them, and can also prevent them claiming they never received them.
  • If you are billing in stages, use payment behaviour to shape your own response – if the customer doesn’t pay to terms you need to consider whether to continue working on the contract whilst this situation persists.  This is not an easy decision!

After you raise the invoices

  • Make use of calendars or functionality within your accounting software to remind you of who needs chasing when:
    • Follow up to confirm receipt within a few days of sending, and at this stage ask if there are any initial problems with getting that invoice paid to terms.
    • Follow up again a week or so before the invoice is due to be paid, again to see if there are any problems with payment.  Obtain a payment date at this stage if possible.  Follow up on any issues/hold ups.
    • If funds are not received within a day or two of a promised date, follow up again.
    • Make sure you communicate with any central payables function and your contacts if appropriate.
    • Use statements and a dunning letter process (where you send out a series of letters at defined points in time once a debt goes overdue – starting with a gentle reminder right through to pre-legal action).
  • The law is on your side if your customer has paid you late – there are statutory provisions for charging interest on invoices that are undisputed and paid late.
  • As a last resort you can obtain third party help in collecting your problem debts.

At Jameson Accounting we want our clients to succeed and are more than happy to discuss your current approach to invoicing and collection – we can review draft contracts, or assist in drafting dunning letters for you, to name but a couple of examples.  If you are looking to switch accountants, we will always hold any initial meeting with you on a free of charge, no obligation basis – just contact us to set up a discussion.