Acumenica's Top 10 Cash Management Tips

Acumenica's Top 10 Cash Management Tips

I’m a small business owner as well as an accountant. So I’ve seen the inside of many an SME. Here’s the single most important thing I’ve learned: As a leader of a business, especially a small business, your main role, almost your only role, is to ensure the positive cash flow of the business.


If your business is experiencing liquidity issues, here are ten practical tips you can implement into your systems straight away:


1. Prepare a robust and honest short term cash flow forecast


If you can't measure it, you can't manage it. And one of the key tools for cash flow management is a weekly or even daily cash flow which takes into account all guaranteed, expected, and anticipated income and expenditure. You'll very quickly understand whether the business can operate within it's available cash resources. Once you know this, you can start making decisions on whether to delay payments, accelerate receipts, or arrange finances (more of which to come.)


The cash forecast doesn't need to be glossy or sophisticated: a straightforward showing all transactions with a running bank balance is enough. With that being said, however, if you are going to rely on external support from suppliers, HMRC, or the bank, it is likely you'll need something a bit more professional. We can help with that.


By the way, all businesses, not just those coming under cash pressure should maintain cash flow forecasts at least on weekly basis to aid in the business decision making process.


2. Invoice accurately and quickly


If there’s one thing that’s certain, if you make a mistake on an invoice, it will not be paid. Remember that your customer may also be working within serious cash flow constraints and will be look for reasons to not to pay until they absolutely have to. If you make a mistake on your invoice you can guarantee that this will give them an excuse not to pay. Don’t give them that excuse: make sure your invoices are correct.


The quicker you can get an invoice to Accounts Payable of the customer, the better. Many online accounting systems like Freeagent or Xero allow you to generate invoices on the fly and email them immediately. The quicker the invoice reaches the client, the quicker you’ll get paid. And if you have the facility to accept payment by card, you can link directly to the payment screen from the invoice, so the customer can literally pay straight away.


3. Be easy to pay


In today's world, customers expect things to be easy. And that goes for paying suppliers. If you don't give your customers the opportunity to pay by their preferred payment method, you might lose a sale, or you'll go to the back of the queue.


Offer as many payment methods as possible: cash, cheque, bank transfer, credit cards. Oftentimes, you don’t even need to set up a merchant services account. Apps such as Stripe and  iZettle can have you accepting card payments online in a matter of minutes. And there’s obviously PayPal as well.


Make sure all methods are clear on your invoices, and include a big bold PAY NOW button on your online assets that'll drive customers to your payment gateway.


4. Don't forget the tax man


The money you cough up to the tax man every year can mount up, especially if you are VAT registered. It's good practice to remember that this isn't your money, and if you're following tip 1, you'll know to provide for this. (It's actually not a bad idea to have a separate bank account to put all your tax provisions into, and ignore it as far as possible for business purposes.)


But what if you already have a tax debt that HMRC are asking for? Over the lockdown period, there was a moratorium by HMRC whereby they were pretty relaxed about collecting tax due: they wouldn't really put much pressure on you to pay and, if there were other more pressing creditors, they'd likely get paid sooner. A squeaky wheel gets the grease, right? Now, though, HMRC have had their claws sharpened and are looking to be paid.


The combination of the two means that a business may have a higher HMRC debt than they would normally have, and they have a very motivated HMRC trying to collect. A problem.


Early engagement with HMRC is essential if tax debts are a significant drain on cash flow. You must contact them as soon as possible to arrange a Time To Pay agreement. If you've prepared accurate cash flow forecasts, you will know how much you can afford to pay each month, and if you can show HMRC that the cash flow is sustainable, then they are likely to extend favourable terms. Typically, full payment will be required over a six to twelve month period, although we have seen this extended, on one occasion, up to 48-months.


A key condition to any TTP is that your tax compliance throughout the period must be flawless: all returns - PAYE, VAT, CT etc - must be filed on time and all future liabilities must be made on time too. Seldom are excuses accepted.


5. Minimise fixed cost expenses


So far we’ve focussed on getting cash IN. But, nothing drains cash flow like fixed costs when there’s nowt coming in. Start ups should avoid costly rents and staff costs until there is a level guaranteed income. Need a place to work? hot desk. Need a meeting space? try a local cafe – it’s free and surprisingly professional. Use a virtual PA or call answering service until you can afford a real person to answer your ‘phone and make you coffee.


Look for value in every line item in your P&L: can you change your phone contract? What about your energy suppliers? Is there a cheaper office supplies option? Small savings in each category can add up. But...


One of your largest fixed costs is likely to be Salaries or Wages and you might be forced to lay off some staff. This could well be the difference between surviving and business failure. If you are going to make redundancies, cut once and cut deep: it’s better to make the redundancies than have the threat hanging over your existing team members: a jittery workforce, in fear of their jobs, are not effective in the fight for business survival.


Be careful of the costs you do cut or stop altogether: marketing tends to be one of the first costs to get cut, but you need marketing to bring business in. Without it you'd be dead. By all means carefully assess your marketing spend for value and effectiveness, bit don't stop marketing activities.


Accountancy is also often one of those costs that can be looked at, but I'd argue that in a time of cash flow pressure, your accountant should be involved more in your business, not less. So, don't cut the accounting fees. (I would say that, though.)


Reducing expenses also applies to the business owner personally as well as the business itself: if you can reduce your spending it will (a) reduce the amount of cash you need to flow from the business to your personal account, and (b) foster a “we’re all in it together” culture within the team.


6. Use your supplier payment terms to your advantage


A huge part of your monthly outgoings is likely to be to suppliers for goods or materials. You need to make sure this isn't an unnecessary drain on your cash flow.


I’m not suggesting you take the mickey out of suppliers but if you’ve negotiated terms, use them. If you’re given thirty days, pay on the thirtieth day. But not a day later. When you have a surplus of cash it may be an idea to pay early as well. This will normally give you some goodwill with your customers and might allow you a little flexibility when the time comes that there is a bill due and there’s no cash available for it.


During the current crisis, many (definitely not all) suppliers are being extremely lenient with their customers. You should try to take advantage of this by arranging improved terms. Remember that the businesses you work with are also worried about their survival and great deals are to be had. You can leverage this but also remember that these businesses are in the same boat as you. So, be fair.


7. Consider invoice or trade finance


Invoice finance can be a great way to free up cash flow and to deal with slow paying customers. Also known as factoring, invoice finance is where a lender will use the value of invoice as security to "lend" you a percentage of this invoice freeing up capital immediately. Your customer will then pay the invoice direclty to the financing company and when this happens, they will release the balance after deducting their facility fee.


Use the invoice finance market to your advantage. The difference between the cheapest facility and the most expensive can be enormous. However, structure is arguably more important. If you have a facility that is restrictive it will cause you frustrations and stifle growth. 


Top tips:


> Look beyond headline rates. Some lenders charge you for sneezing. > Understand total costs.

> The headline prepayment rate is against eligible debt. What constitutes eligible debt?

> Understand potential restrictions such as individual debtor limits, concentration limits, export caps, etc..

> Make the facility as future proof as possible. Are you looking to export, expecting a large new customer..


Other facilities that can help with cash flow and supplier payments are trade finance, supplier finance and stock funding. At a time when customers are paying slower, suppliers are tightening credit terms and businesses are increasing stock levels to deal with supply chain issues, cash is tight. Understanding how to finance your trade cycle is important.


8. Invest in stock management


Stock, whether its goods for resale, or the raw materials required to make your products can be a significant part of your working capital, and should be closely monitored outside times of cash pressure, and thoroughly reviewed during difficult times.


The skill in inventory management comes in buying the correct stock, in the correct quantities at the correct time. This isn't always easy, and requires a bit of crystal ball gazing. It's quite a balancing act: don't order enough of a product that proves popular, and you end up missing out on profitable revenue; buy too much of an unpopular item, and you end up having to sell at cost, or at a lost, or worst, dump it.


If stock/inventory is a big part of your business, you should consider investing in a system that can help. You can track what sells, what doesn't, how quickly things move, what you need to re-order, and when. All things that are hugely important and impact on cash flow.


You also need to consider the costs of carrying stock. It costs money to store stock, manage stock, insure stock - all costs which will have a cash flow impact.


And remember, sometimes you need to accept that you've made bad choices, and cut your losses. If you need to sell stock at a loss to cash in the bank, then hold your nose, and discount the stuff you won't get the ticket price for.


9. Communicate with all stakeholders


Given the sensitive nature of having cash flow pressures, it's natural to stick your head in the sand, and hope it'll go away. No way, Pedro. Thats not smart.


What you need to do is communicate with all stakeholders, and quickly. This is a zero sum game: if you want to take measures to take the pressure off YOUR cash flow, it stands that this will increase increase pressure on SOMEONE ELSE's. If you're going to do that, play fair, and let them know in advance. Normally, to avoid the matter becoming adversarial a collaborative approach is preferable. And people are more likely to be collaborative if they're not surprised.


10. Align yourself with people who are like-minded


If your team and your accountant don't think along these same lines as you, then you're on a hiding to nothing. Align yourself with an accounting team who will help you implement all of these measures, and will hold you accountable, and be held accountable, for them. Of course, you do don't need to use your accountant in this area, but it does help. If you think you need outside expertise in this area then you need to make sure you pick an accountant who can work with you on this. 


We appreciate that finding an accountant who can help with these things, can be difficult. Acumenica help out cash pressured businesses day-in, day-out. Do you think Acumenica could help your business? The next step is to book a call with an Acumenica accountant so we can find out a little more about your business and how we can help you. Definitely no hard sell and no obligation. 


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