Three steps to strengthening your cashflow

Chris Spratling

Chris Spratling, founder of Chalkhill Blue consultants, explains how businesses can strengthen their cashflow to weather financial challenges ahead.

The UK economy has been ravaged in the last 18 months. Between Q4 2019 and Q2 2020, GDP shrank by an eyewatering 22 percent. Over £118 million was wiped off our national income. These are body blows to our economy. Despite this, the country’s SMEs have come out fighting. Significant proportions have watched turnover, profit and investment grow.

However, while there is much to be heartened about, dark storm clouds are brewing on the horizon. In a recent survey of SMEs, the financial challenge of strengthening cashflow was cited by 54 percent of them. Put simply, this means ensuring money coming into the business exceeds the value of payments that need to be made. There are three key steps towards mastering both sides of the equation.

1. Reviewing and improving processes

The first is to review existing finance systems and reporting. Doing so can uncover some simple, yet often overlooked improvements. For example, always invoicing immediately. Some businesses might choose to put time aside to do invoicing once a week. This may seem practical in terms of managing workload, but it delays payments. There is any number of invoicing tools on the market that can make instantly sending one simple.

Another enhancement is offering incentives for advance payments, with a financial discount. Furthermore, if a piece of work will incur upfront costs, it’s worth taking a deposit. This will ensure any payments made are done so with a client’s funds. It’s also worth considering staged payments. This can be linked to dates throughout a project or even deliverables or milestones.

But even if your invoicing is run like a well-oiled machine, that doesn’t mean a customers’ accounts payable will be. In fact, 30 percent of invoices are not paid within the agreed terms and large companies tend to take 30 percent longer to pay then their smaller counterparts.

Always chase late invoices. Again, it may sound obvious, but small businesses are collectively chasing £50bn worth of invoices, according to the Credit Protection Association. They shouldn’t have to and should avoid thinking it’s rude to do so. Most people would agree that it’s ruder to avoid paying. However, if you’re really worried about a client relationship, it can help for someone other than the day-to-day contact to chase.

Failing this, there is the option of charging interest on overdue payments. By law, a business can add eight percent plus the Bank of England base rate for business-to-business transactions. This might sound complicated, but The Government’s small business commissioner has created a calculator for anyone to use.

You could even do away with the invoice altogether and ask for a credit card payment. Invoices have a 30-day payment rule built in by law – even if it’s not in writing. A card payment can be instant.

There should also be rigour applied to the accounts payable side of a business. Hold regular cost reviews with suppliers to assess whether they’re offering value for money and to see if reductions can be made.

It may also be possible to negotiate supplier discounts or longer payment terms. In some cases, non-essential purchases can be delayed, or inventory levels can be reduced, so less cash is tied up in stock.

Among all of this is the need to know how cashflow links to invoicing at the glance of a screen. There must be tools in place for financial reporting. Without this, it’s merely guesswork. Luckily, the market for financial management software is a buoyant one and there are solutions for all sizes of business.

2. Reviewing and improving skills

With tactics like these in place, it’s also worth stepping back from the day-to-day management of cashflow and reviewing capabilities within the finance function so they align to growth ambitions. For the smallest of businesses, with owner-managers running invoicing, this can be as simple as outsourcing elements of it to an accountant.

For bigger SMEs, it could mean hiring specialists to manage the finance function. This might start with all-important bookkeepers but can develop into billing, payroll, and tax specialists, accounting managers, financial controllers and a finance director.

This hiring process needs to be aligned to a business plan, allowing the team to grow with the scale and complexity of the finance department. As a firm expands, it needs to change the function from tactical and process-driven to strategic and consultative. In time, a finance director should be on the board to provide and plan of action and guidance. This must be carefully planned because there is a growing skills gap.

3. Looking to the future for funding

With an eye on the future, firms should also build relationships with potential investors and funders to get the cashflow boost they need to expand. While this may seem a long way from the basics of chasing an invoice, it’s vital if a small business wants to become a medium-sized one.

Too many companies get stuck at a certain point in their development because they don’t consider this. They focus on profit margin rather than going for growth through investment. Or they may not even think the investment is available. But it is. In fact, Global Venture Capital investors are continuing to put record amounts into the UK scaleups. Over £11.8 billion was raised between January and June this year alone. It’s crucial to find links with this community.

As the economy bounces back from the pandemic, it’s vital that businesses solve their cashflow challenges and get fit for the future. This needs to encompass everything from simple changes in process at the bottom, to strategic planning for investment at the top. It all has its place.

If this doesn’t happen now, when the economy is rebounding and investment is available, it could mean those firms with poor cashflow don’t survive should we encounter another economic shock. You never know when the next financial crisis or pandemic might hit.