How to manage your company cash flow

April 12, 2017

People talk a lot about profit and loss in business, but really it is your company cash flow that determines whether you thrive or not – your ability to receive payments promptly when they are owed to you, so that you can use that money to offset any losses.

Companies have gone bust with huge sums of money owed to them, simply because they did not get that money paid into their account in time to clear their debts.

But if you manage company cash flow better than that, your business bank account balance should stay looking healthier for longer, allowing you to make the best use of the money you earn.

In general, if you have more money coming in from customers (‘accounts receivable’) than going out to suppliers and other costs (‘accounts payable’) then your cash flow will be positive; if not, you will be in a state of negative cash flow, known as a shortfall.

You might find it easier to compare this to the equity in a house – if the value of the house falls (similar to paying out more than you have coming in) you risk going into negative equity.

How can I manage company cash flow better?

To improve company cash flow, stop thinking about your bills and invoices as ‘just’ amounts of money – think about them in terms of when that money comes in or goes out, too.

For example, you have two invoices, both worth £10,000, but one is due to be paid today, while the other is not due to be paid for another 30 days.

On paper, both of those invoices have the same cash value, but it is clear that the first one is more ‘valuable’ to you in real, immediate terms, especially if you have a bill for up to £10,000 of your own to pay in the next 30 days.

Cash flow is about adding that extra dimension of time to the flows of money in and out of your company, and doing what you can to bring forward payments in, and to reasonably delay payments out.

Breaking even

As mentioned above, staying out of a negative cash flow position is the first priority, and gives you a good platform on which to build greater profits.

Of course, on any given day, you might have a large bill to pay, so don’t panic if that day’s cash flow appears to be negative – it’s all about trending upwards over the short to medium term.

If you’re finding it hard to break out of negative cash flow, then look again at the total amounts you earn and owe: is your company profitable overall? Could your cash flow break into positive territory if enough of your customers paid more promptly?

Pay it forward

Incentives can go a long way towards encouraging better cash flow behaviour, both from your customers and from your suppliers.

Consider asking customers to put down a deposit or a partial payment upfront in return for preferential treatment, or offer them a small discount for payment on delivery or within just a few days of receiving your invoice.

Similarly, see if you can get discounts from your suppliers for paying more promptly – this might mean money goes out of your account sooner, but over the long term the savings could be more valuable to you than delaying payment.

Don’t risk it

The worst case scenario is when you are unable to pay your own bills on time, and this is often what tips companies into insolvency, for example, if the electricity gets cut off or a key supplier refuses to make a delivery.

Where possible, don’t risk going overdue on a payment unless you really have to. Some companies routinely ignore invoice deadlines, especially if they have their own fixed dates for processing payments, but you run the risk of facing debt recovery action, plus statutory interest and late payment penalties.

By paying more promptly when you can, you are much more likely to find your suppliers willing to negotiate on those occasions when your cash flow takes a momentary hit, for example, if you are paid late on a major contract.

Blue sky thinking for rainy days

Don’t assume it will never happen to you. It is not pessimistic to plan for future cash flow problems – set aside some money when you can and try not to touch it except in emergencies.

There is actually a lot of optimism in being able to prepare for future hurdles in this way, and by keeping on top of your cash flow better over the long term, you should be in a good position to spot any problems as they develop, and take action to prevent them from getting out of hand.

Practical steps

Aside from the general reasons why better cash flow management is worth your time and effort, there are some practical steps you can take to improve cash flow quickly:

Track it. Don’t rely on a rough idea of your cash flow position. Write it down, subtract your payables from your receipts and work out exactly where you stand – and whether that position is improving or not.

Collect it. Faster payment of invoices by your own customers is one of the most direct ways to improve cash flow. Invoice promptly, issue reminders as the deadline approaches, and take action to recover any overdue debts as soon as you can.

Delay it. There’s a reason why the biggest brands pay their suppliers on terms of 180 days or more. Make sure you are not paying same-day if you could be paying 30-60 days later, but don’t push it so far that you incur extra costs or lose track of what you owe.

Delegate it. If tracking your cash flow is getting out of hand, delegate it to an employee who you trust, and who has a good head for figures.

Outsource it. If nobody fits the bill, outsource your credit control. The improvements in payments coming in can easily cover the cost of doing so, and the admin burden on you will be lifted almost overnight.

Remember, it’s not purely about maximising your profit – it’s about how quickly you can turn that profit on paper into cash in your business bank account, which can then be used to buy supplies, pay bills and fund future growth.

Spending on better credit control, faster invoicing and consistent, prompt debt recovery action can have a positive overall impact on your financial position – so if you’re having trouble improving your cash flow in-house, don’t be afraid to seek help from a reputable credit control agency.

The information provided in all of our blogs reflects only a narrative of some elements to consider on the topic. The blogs do not contain considered legal advice and should not be relied upon as advice. Please see our website terms and conditions for full details of our disclaimer. If you are interested in obtaining advice, please contact one of our lawyers who will be happy and able to advise you on your own particular circumstances.

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