Cash flow is the balance of all the money which flows into and out of your business each day. It is the actual payments of money rather than what is owed to you by debtors or what you owe to your creditors. Inflow of cash usually comes from sales, while outflow of cash is money used for expenditure, including your overheads, salaries etc.
What financial options are available for improving cash flow?
Overdrafts, bank loans, factoring, invoice discounting, trade finance and venture capital are the main options for improving cash flow. Each option has advantages and disadvantages.
Why do I need to write a business plan?
Writing a business plan helps focus on specific aspects of the business and give you an important document to help secure finance and support. All banks and others giving out money will expect to see one and your loan, grant, or overdraft etc. will depend on it. (See article on writing a business plan.)
What should I include in a business plan?
The business plan should be a straightforward document, plainly written, which describes the business, its strategies, markets and financial forecasts. The plan needs to include:
- an executive summary – an overview of the business
- a short description of the business opportunity – who you are, what you plan to sell or offer, why and to whom
- your marketing and sales strategy – why you think people will buy what you want to sell and how you plan to sell to them
- your management team and personnel – your credentials and the people you plan to recruit to work with you
- your operations – your premises, production facilities, your management information systems and IT
- financial forecasts.
See Duport article on writing a business plan.
What is the difference between a loan and an overdraft?
Overdrafts are most useful for short term funding. They are easy to arrange and relatively cheap, but you won’t be able to exceed the limit agreed (if you do renegotiate there will be fees to pay). Banks can demand instant repayment.
Loans on the other hand are more secure and can be fixed for periods of between one and 30 years – at fixed, variable or at monthly managed rates.
What is factoring?
Factoring firms normally give up to 80% of the value of each sales invoice outstanding. This enables firms to improve cash flow – for a price. Normally, the bank or factoring firm will release the money within 24 hours of receiving the invoice. The firm then collects outstanding payments from the customer. Factoring is particularly useful for fast growing businesses or those that have very high value invoices but have to wait 30–90 days for customer payment.
What is invoice discounting?
This is similar to factoring, in that the bank or firm advances around 80% of the value of the sales invoice. But, unlike factoring, you still have to chase up the invoices and collect the money.
What is trade finance?
Useful for companies who purchase goods where credit terms are not available. The trade financier funds the purchase of goods upfront, making it easier to fulfil an order.
What is venture capital?
Limited companies can sell some of the shares in return for an investment in the business. Outside investors such as venture capitalists or business angels expect big profits for taking risks. They will want to sell their shares at some point to maximize their profits (which may not be convenient to you). Don’t go down this route without specialist advice.
How do I check my customers will pay me?
Use credit reports for bigger orders. Getting credit ratings online is fast and cheap. Trade associations or Chamber of Commerce may also offer credit scoring. Check with your local business link.
Request a copy of the company’s latest accounts (£5 by email from Companies House) – some companies may happily show them to you for free if you ask.
Get references. Find out how long the referee has dealt with the customer and what credit period they give the customer and whether they get paid on time. Ask what credit limit the customer has and how much is currently outstanding. Find out if they have any connections with the customer – other than as a supplier.
Bank reference which cost around £25, may take time and may not always illicit the detailed information you need.
How do I control customer credit?
Set an upper credit limit for each customer – based on references and your checks. Never give more credit than you are prepared to risk.
Set a minimum order size for credit accounts. Keep control, and check if anyone tries to exceed the limit set. If a customer wants more stock than you are prepared to give credit for agree for them to pay the balance in cash.
How do I draw up credit terms?
Accountants, lawyers or trade bodies can help draw up a set of credit terms to you’re your business. Credit terms must be understood and signed by each customer to show they have agreed them. The terms will set out the maximum credit period ie how many days after the invoice payment is due, or whether there is a fixed day or month to pay on.
What must my sales contract include?
A standard sales contract should include terms like:
- you still own the goods, after delivery to the customer until they are paid for
- the customer must tell you within a set time if a delivery has not been received.
Again you can get professional help to draw these up – it should not be expensive. Take advice and make sure you cover all your options.
How can I reward good customers?
You could consider offering a discount for quick payment or offer rebates to regular based on a percentage of the value of their purchases.
Can I claim interest on late payments?
Yes. By law you may charge interest at the Bank of England base rate plus 8%, calculated on a daily basis for each day payment is overdue. However these terms must be outlined in your terms and conditions.
How can I develop a good system for credit control?
- invoice promptly
- call to check that goods have arrived and customers are happy. Use this call as both good PR and to confirm the payment details
- keep unpaid sales invoices in date order, so you can see the oldest outstanding invoices
- have a regular slot each week to chase outstanding invoices. Always focus on the largest debts first, followed by the oldest. But also chase up early any customers you suspect may have problems paying. Don’t put it off. If you can’t do it yourself, get someone else on the case, but do not let the timescale slip. Make sure a note is made of the outcome of the conversation
- don’t allow additional credit if someone exceeds your credit limits. They must pay the excess before being allowed more credit. If your gut feeling tells you there is a problem, then don’t allow any more credit but insist on cash
- once a month the total credit outstanding across the whole of the business should be checked and recorded. This gives a good snapshot for now and a comparison for the future.
How should I deal with habitual late payers?
Call them just before the payment is due to confirm it will be on time. Stop all credit until the debt is paid. Customers who make a part payment should have all further credit stopped and told to pay the balance owed immediately. If a customer queries an item as an excuse not to pay the entire bill you should insist on full payment for the rest of the order and deal with the query separately.
People sometimes send incorrectly written cheques as a delaying tactic. Ask for a new one immediately and let them know you will not supply more goods until the cheque has cleared. Make sure everyone in the office knows about dodgy or slow paying customers and what the company policy for dealing with them is.
Have a system for chasing debts. Telephone late payers after a week and ask for a reason. Keep a written record of the conversations. If you can’t get hold of someone, try at different times of the day and send reminders out. Call regularly. Develop tactics to deal with excuses. For instance if you are told the cheque is in the post, ask for the cheque number. If the customer says they don’t have the money leave them in no doubt you will chase your money. Employ a debt collecting agency if necessary – which will end up costing them substantially more. Be polite, persistent but never apologetic – it is your money and you are determined to get it.
How do I start legal proceedings to get my money back?
Send a letter of claim to start the legal process. The letter should say you plan to sue for outstanding bills if they are not settled by a fixed date (10 days is sufficient). Amounts up to £5,000 can be claimed through a county court. This does not have to be complicated (see other Duport articles on chasing debt).
Why are some large companies so slow at making payments?
Big firms have their own rules and late payment is not necessarily deliberate. Invoices often pass through several different departments before payments are authorised. Invoices can be rejected until you send a statement. Many big companies only print cheques once a month. If you don’t understand the system or when the print cheque run is, it could be months before you are paid and the effect on cash flow can be devastating. If you deal with larger companies – and it can be lucrative – you need to gather as much information as possible from the accounts office beforehand.
What responsibilities do directors have when businesses get into financial difficulties?
If a business is in trouble directors must make an early decision whether or not to cease trading or face investigation and possibly contribute personally to the company’s losses.
Deciding whether or not to continue to trade can be difficult, but directors must ensure that there is a reasonable prospect that the company will avoid insolvent liquidation before being party to any decision to trade on.
Under UK law if a company is trading insolvent, a director may be liable for wrongful trading. The director must cease trading immediately and take steps to liquidate the company. Directors may escape liability for wrongful trading if they can prove adequate steps was taken to minimise the loss to creditors after it became apparent the company was insolvent.
Where can I get more help?
Useful websites include:
www.venturesite.co.uk not for profit gateway service for small companies seeking equity finance and business angel investment
www.factoringuk.com independent brokerage specialising in debtor finance offering free advice on factoring and invoice discounting without obligation.
Also www.bibbyfinancialservices.com cash flow solutions to SMEs
www.abfa.org.uk the trade association representing the asset based finances industry. Members provide financing to 46,000 businesses. Very informative site.