If you asked me what I thought was the most important thing to consider when running a business, I would say cash flow.
Yes, a good product, top team, financial discipline, brilliant branding, and so on are all important, but without cash flow, chances are everything else comes tumbling down. It’s the blood of a business.
Cash flow remains a huge struggle for businesses today. Rolling from invoice to invoice, expense to expense, wondering how you’re going to manage over the next seven days, let alone that looming tax bill over the horizon.
So, let me give you ten tips on how you can drum up some extra cash. Maybe one of these will help you and your business.
Give your expenses a spring clean
Simple, but surprisingly effective. Go through your expense base with a fine-tooth comb and look at what you’re spending money on and why. It could be a subscription you no longer need, a supplier you could renegotiate with, or a service you’re not using anymore, but you may be able to make a few changes that give you a little bit of extra cash.
It’s always worth doing this personally too and having a quick look at any direct debits ticking over.
Issue a discount for prompt payment (or charge a premium for late payment)
Offering your customers a discount for prompt payment could give them the initiative to pay you early. Or, framed in a different way, you can charge them a premium if they pay you late.
I would always ensure your ‘discount’ price is the price you would want to normally receive anyway. Just ensure you make any terms you offer clear on invoices you send out.
Look at your payment methods
One of my clients came to me with £8,000 of debtors on her balance sheet. When I enquired why it was because she was simply relying on the good faith of her customers to pay her promptly. Inevitably, some needed the odd nudge, some needed heavy nudging and some took months to settle their invoices.
I suggested she use GoCardless and request her clients, particularly those who worked with her regularly, sign up to mandates. The result? No more chasing, time saved, and those debtors shrunk to a quarter of their size.
Maybe consider offering other payment methods, such as a credit card payment, to your clients too, so they have more options to pay you promptly.
These services will charge you a fee, but the speed of the cash flow along with the time saved chasing make these worthwhile tools in most cases.
Could you be paid differently?
I’m a big believer in the subscription model. Instead of having huge lumps of income (and barren spells with no income), it is always better to smooth it over a period of time. It gives you more certainty and consistency with your income. If you provide a service which is recurring, such as a maintenance contract, or provide a regular blog each month, why not contemplate suggesting your clients pay you on a monthly basis? They may appreciate paying a little less over a longer period, than a huge bill at the end.
Another common way to get paid is to offer a small discount if they pay upfront. Software companies do this quite often.
Software like Xero or QuickBooks can automatically send these invoices out for you on a recurring basis too, so you just set it up once and let it take care of itself.
Ask for credit with your suppliers
If you regularly use a supplier, why not ask for payment terms with them? The extra days can help you smooth over your cash flow.
Be careful to spend within your means and ensure your company has a good credit history.
Take a deposit upfront
Taking a deposit is a really nice way of accelerating and smoothing your cash flow and has three benefits. First, by asking for a deposit you are going to reduce your risk of completing a job and not being fully paid. Second, it may deter time wasters from working with you by seeking their commitment early on. And finally, it means that if you need to pay suppliers, for example for materials, that you have the cash to settle them.
Adding in forms of debt could help smooth over cash flow issues.
Debt can take many forms. It could be as simple as taking out a business credit card, or using an invoice factoring service if your clients are traditionally slow payers. Loans as well can inject cash into the business. Ensure you do not become too highly levered, which is to say you have lots of debt in the business and incur high finance costs (interest payments). Some businesses can enter a spiral of dependence on these facilities as well, which can take years to move away from.
For VAT registered Zero Rate suppliers or Construction Industry Scheme businesses – consider monthly returns
If you are VAT registered, supply zero-rated goods or services, and typically receive a VAT refund each quarter, consider moving to monthly VAT returns.
Zero-rated suppliers typically charge no VAT (i.e. VAT at 0%) on goods they provide but may pay out VAT on goods they purchase. This means they are typically out of pocket until they submit their VAT returns once a quarter.
Equally, reforms to the construction industry scheme mean VAT is now accounted for via a reverse charge mechanism. It means you no longer add VAT to your invoices as a subcontractor, but like the above, could be paying VAT on supplies or materials and waiting until the quarter end for a VAT rebate.
Moving to monthly returns means you’ll recover this cash quicker, but be mindful of the extra reporting duties as a result.
Rollback your losses
Bit of a technical one for Limited Companies to consider. HMRC now allows you to carry back trading losses to offset previous profits. Usually, if you made a loss in your business, you would need to wait until you submit your accounts again (usually one year later) to use that loss against potential future profits and reduce your tax.
HMRC now lets you go back and amend your previous corporation tax return to carry back those losses and trigger a rebate earlier on.
There are very specific circumstances this works, but if you run a Limited Company, have had a loss this year but made a profit in the previous years, this could bring forward some extra cash for you.
If you’re struggling, negotiate
If cash flow becomes a real issue, consider negotiating with your creditors.
In most cases, your creditors will be accommodating if you call and explain your difficulties with cash flow. This can give you a few extra weeks to source the funds.
Even HMRC will consider this, through what is known as Time To Pay. There is no one rule for everyone and they will consider terms on a case-by-case basis.
Bonus tip – plan
I cannot finish this article without mentioning planning. Planning ahead is equally important. Forecasting your cash flow will help you spot tight spots in the future. Using software as well can help introduce you to insights or trends, which means you’ll have more awareness of cash flow crunches.
Is cash flow a challenge? Could you use some tools or tricks to get on top of your cash flow? Find out how we can help today.