Successful Cash Flow Management: A Comprehensive Guide

Why Cash Flow Management Is Vital

For businesses of all sizes, cash flow management is pivotal to success. While it keeps owners and creditors content, when done correctly, mishandling it can lead to serious issues. Even rapidly growing and profitable companies are not immune to cash flow problems.

Late payments are a common challenge for small and medium-sized enterprises (SMEs), sometimes threatening their ability to trade and grow, and even leading to insolvency in extreme cases.  It can be especially difficult as an SME to get the guys at the bigger end of town to pay their bills on time.

Fortunately, there are steps you can take to manage cash flow and protect against future difficulties. Below we have listed our top 12 cash flow management tips for you:

1. Strategise to Reduce Costs

• Immediate effects on the bottom line can be achieved by cutting costs. This can include freezing bonuses and overtime, downsizing staff, or negotiating better terms with creditors.
• Look at all areas, big and small, it all adds up. Good places to start include marketing, telecommunications, freight and insurance.

2. Implement Credit Checks

• Before engaging with new clients, conduct credit checks to flag potential late or defaulted payment history.

3. Revise Payment Terms

• Shortening payment terms from 60-90 days to 30 or less can be likened to ending short-term unsecured loans and can improve cash flow.

4. Offer Payment Options

• Provide different payment methods, including accepting foreign currencies if applicable.

5. Set Clear Payment Terms

• Ensure that contracts with new clients include clear payment terms and late fees.

6. Provide Early Payment Discounts

• Encourage prompt payment by offering discounts for early settlements, although this should only be used sparingly to avoid hurting profit margins.

7. Opt for Leasing

• Leasing cars, property, machinery, and other essentials instead of purchasing them allows for smaller monthly payments, aiding cash flow.

8. Consider Raising Prices

• Though often avoided for fear of losing customers, even a modest increase in prices can help. Soften customer resistance by offering bundled products or services.

9. Be Prompt with Invoices

• Quick invoicing is essential. For everyday you don’t invoice, it’s another day you won’t be paid.

10. Implement a Debt Collection Process

• Implement a timely debt collection process, at least once a month. If you don’t ask, you don’t get.  Sending even a gentle reminder can lead to payment of invoices.  Just be sure to have a process and timelines in place to ensure the right amount of follow up and escalation of overdue invoices is done.

11. Utilise Invoice Financing

• Invoice financing companies can offer immediate cash against unpaid invoices for a fee, typically providing 85% of the value within 24 hours, and the rest (minus fees) upon payment.

12. Seek External Funding

• Short-term loans or alternative funding sources, such as peer-to-peer lending, can be effective means to address cash flow needs.

Conclusion

In the challenging terrain of business finance, cash flow management stands as a critical aspect. By adopting the above strategies and being vigilant about potential pitfalls, especially late payments, companies can navigate these waters more confidently.

Numbers tell a story, and understanding that story can help steer a business in the desired direction. With the right strategies and support, your business can overcome the challenges of cash flow and set a path towards growth and success.

The CFO Centre is here to help, our CFOs work as part of your team on a part-time basis. They can evaluate threats and opportunities within the company, aid in financial planning, and promote regular cash flow forecasting. This collaboration can drive smart decisions related to pricing, staffing, and more.  Get in touch if you want to learn more about us.