Cash flow is among the most critical elements of a successful business. However, according to BACS’s Payment Schemes Limited Research, around half of the country’s SMEs are being paid late. Cash flow issues can lead to many problems and even close companies. So how can you make sure your business is building long-term cash flow sustainability?
3 keys to sustainable cash flow
Long-term cash flow sustainability can be achieved by focusing on your cash flow’s structure and implementation. Here are key areas that are crucial for creating cash flow sustainability.
Be clear about your payment terms
It can seem obvious but you need to ensure your customers and clients understand payment terms. Confusion is not something you want to create when people open up your invoices. It’s important that your payment terms are clear not only in your actual invoices but also laid out throughout the whole customer-client process. If you are negotiating with new suppliers or customers, it’s important to stay consistent with your quotations. This makes your payment terms transparent and fair, as well as helps your clients and customers know exactly how much, when and how they are expected to pay.
Inject flexibility and encouragement to your payment systems
You’ll also want to ensure your payment systems use two crucial elements. The first is flexibility. It’s always better to provide people with options on how and when they pay. You’ll want to look into offering different payment options from bank transfers to cash payments, if possible. This gives your clients and customers more flexibility, which can help ensure they never miss the payment deadlines.
The other important element of your payment system is encouragement. You should consider ways that encourage upfront payments. For example, you could give a small discount to anyone paying the full sum upfront or include some kind of other incentives for making early payments in full. These could be monthly plans with Direct Debit or discounts for the next payments when they pay on time. Even the smallest of incentives, combined with enough flexibility, can create a more pleasant payment experience and reduce issues within your cash flow.
Chase after payments as soon as possible
Finally, it’s crucial to understand your responsibility in enforcing your payment terms. Cash flow problems are not just the fault of bad behaving customers and clients – you must make it obvious that payment problems are not tolerated. This means that you need systems in place that alert you to late payments as soon as invoices are late. It can be easy to overlook a few days and think that it’s better to let the customer deal with it but being overly polite here doesn’t work. You can’t procrastinate on even the smallest of payments because they can create big problems in the long-term. For long-term cash flow sustainability, you have to chase up payments the moment they are overdue. If you don’t, customers and clients can get complacent and potentially take advantage of your lax approach to payments.
The good news is that if you’re uncomfortable about chasing people and the impact it might have on your relationships with clients, you can separate yourself from the process. It’s possible to have your accountant or a lawyer engage on your behalf. This way you can just focus on running the business, while your accountant makes sure payments are made on time and your cash flow doesn’t suffer from disruptions due to late payments.
How to cover issues in cash flow?
Even when you build long-term sustainability in your cash flow with the above tips, you might still find your business suffering at times. But you don’t have to let problems turn into a disaster, as there are options that’ll help cover and deal issues in your cash flow.
One option is to get an injection of cash through cash flow finance. In it, a lender will offer a loan backed by revenue your business is expected to earn in the future. Cash flow finance is short-term funding that can provide you with long-term sustainability in managing your business finances. This funding itself is not long-term but rather a quick fix to ensure you don’t develop long-term problems.
The key to successful use of cash flow finance is the understanding of this short-term nature and the importance of using it as a tool to prevent a problem. You can’t use cash flow finance as an alternative for not having cash – it only works when you have a temporary break in cash flow. For example, you could be:
- Going through a seasonal peaks and troughs in your sales
- Growing your business and customer base, requiring investment
- Having a temporary delay in payments
Therefore, you can use cash flow finance for getting over a rough patch. But the key is to know you have money coming in down the line.
Get help with business finances
Long-term cash flow sustainability is an important part of building a successful business. You will need to model your cash flow to ensure you can cover business expenses and continue on a path of business growth. This sustainability can be built into your cash flow systems through strong and transparent payment processes that provide clients and customers flexibility. If problems do arise, the good news is that there are ways to help with short-term problems in cash flow. Injection of cash through cash flow finance can help guarantee your long-term sustainability doesn’t suffer in the face of small hiccups.
To help you with long-term cash flow sustainability, talking with an accountant can help. At Devonshire Green, we have a strong background in working with SMEs and helping them with anything from budgeting to invoice management. If you’d like to improve your cash flow management, don’t hesitate to contact us so we can figure out how to best help your business!