Cashflow dangers ahead: how to avoid problems

Despite talk of an economic recovery, many businesses continue to find themselves in choppy water. Almost without fail, business failures peak around 18 months after positive growth returns, and mismanagement or irregular cashflow are commonly cited reasons for business failure, particularly in these crucial months.

A number of business groups and accountancy firms have recently warned that the period immediately following a return to economic growth is the most dangerous for businesses, and there is little reason to believe that it will be any different coming out of this recession.

Suppliers will begin to tighten their payment terms and start to chase invoices more aggressively – but, at the same time, your clients are likely to remain reticent about pay promptly. If you are to successfully navigate the difficult time ahead, you must ensure that you have mechanisms in place to properly regulate your cashflow.

Set your payment terms - and stick to them

As a supplier, you have the right to set your own payment terms. In some cases your freedom in this area may be curtailed by convention; for example, in some industries potential clients will assume that they have 30 days to settle an invoice, and will look elsewhere if you demand payment sooner. But unless you find yourself in this situation, you should set payment terms that help you regulate your cashflow.

It is important that your clients are aware of these terms. Make them clear from the outset and include them on any invoices you raise. You should also remember that you are well within your rights to chase clients that are late with payment. You might want to send out reminders close to the end of the payment term. If a payment is late, start chasing on the first day that it is overdue. Often, a single phone call or email is enough to ensure that an invoice is settled.

Consider factoring

Factoring is an invaluable tool for businesses of any size. Factoring and invoice financeservices mean that you can receive up to 90 per cent of the value of invoices you raise, within 24 hours of raising them. The factoring partner will then chase the invoice when it becomes due, and pay you the remaining value, less a small fee.

Factoring has a variety of applications. Many firms use it to smooth over unexpected troughs in cashflow. Increasingly, though, factoring is being used by businesses that wish to quickly seize an opportunity for expansion when they are unable to secure credit from a bank or other lender. Comparator services like Simply Business can help match you with a suitable factoring partner to ensure that you get the most from the service.

Manage your expenditure

As well as making sure that your invoices are paid promptly, you must also keep a close eye on your expenditure. Draw up realistic cashflow forecasts to help you identify potential danger areas. You might want to read our article on creating a cashflow forecast for more information on this.

If you are considering expansion, make sure that you retain enough cash to meet your existing liabilities. A significant number of firms fail not because they are in bad financial shape, but because they expand too quickly. The coming months are likely to present some great opportunities for small businesses looking to grow – but you must tread carefully if you are to avoid disaster.

Credit checking

Very few SMEs utilise credit checking services for clients. Remember that when you give your clients 30 days to pay, you are essentially offering them a 30 day loan. You would not think twice about being asked to submit to a credit check if you were applying for a loan, so why should it be any different for your clients?

Credit checking can help you identify and filter out clients that are likely to have problems paying their invoices. There are several credit reference agencies offering affordable solutions for small and medium-sized businesses. Similarly, business groups like the Forum for Private Business offer their members free access to key business data gathered from the major agencies. If you are concerned about your clients’ ability to pay, you should seriously consider investigating these facilities.

The importance of cashflow cannot be overstated. Even profitable businesses can fall victim to poorly managed invoicing practices, or over-ambitious expansion plans. It is important that you take the necessary precautions early. Taking steps to protect yourself when times are good will help to ensure that you are well-placed to survive when times are bad.