Cash flow is central to the success and profitability of your business.
Without enough working capital in the bank to cover your expenses – either those that are planned for, or those that crop up unexpectedly – you will struggle to keep your company afloat. But your cash flow is another valuable measure of how your business is performing financially.
Positive cash flow indicates that your liquid assets are increasing, meaning there’s money available to settle debts, reinvest in the business, pay overheads, reimburse shareholders, and provide something of a safety net against any unforeseen expenditure. Negative cash flow, on the other hand, indicates that your company is either spending more money than it is making, or much of its capital is tied up in accounts receivable (most commonly unpaid invoices).
To keep a close eye on your finances, you will need to report on operating cash flow, investing cash flow and financing cash flow within your monthly management accounts. You can learn more about the importance of cash flow statements, and how to interpret and understand them, in this previous post.
What do you do if cashflow is an issue?
Most companies will face cash flow problems at least once in their lifecycle, and negative cash flow can occur for a number of reasons. Poor cash flow does not always happen as a result of mismanagement or poor decisions – it can creep up on finance departments over time, largely when cash flow statements are not being reviewed on a regular basis.
But if you are experiencing cash flow challenges, it doesn’t really matter how you got here. What you need to do is take action to reverse the trend.
Here are 5 things you can do to start fixing your cash flow problems and get your corporate finances back on track.
1. Cut costs
It sounds obvious, but getting rid of expenses is one of the quickest and most effective ways to boost your company’s bank balance. Where you decide to cut these costs will very much depend on how your business is structured, and where savings can be feasibly made without impacting too much on your operations.
When consulting with cash-strapped clients, our finance directors often explore means of cutting costs by putting a temporary freeze on ‘nice to haves’ – for example, bonuses, commissions, overtime payments and shareholders’ dividends. Communicating the need for these measures with members of staff can be challenging, especially if they have come to expect this kind of remuneration due to the company’s past performance. In our experience, however, most will understand the longer term benefit of tightening the collective belt.
Elsewhere in the business, you could:
• Approach your creditors and ask for more competitive or more flexible payment terms
• Reduce your inventory
• Reduce travel costs by encouraging virtual conferences in place of face-to-face meetings
• Consider letting your employees work remotely, removing the need for a physical office (and all the overheads that come with it)
• Hire interns or apprentices in place of fully trained staff
You could also consider freeing up some cash by letting go of one or more of your employees. We consider this to be something of a last resort, however, not least because the redundancy processes associated with reducing your teams can be long-winded and fraught with pitfalls for the inexperienced.
2. Review your creditors
Cash flow problems often come about as a result of unpaid bills. It’s important to carry out credit checks before committing to a client or supplier relationship, then take a view on working with any companies that have made late payments or defaulted on payments with their suppliers in the past.
That said, even clients with seemingly squeaky-clean credit histories can drag their heels when it comes to settling your invoices, so it’s important to set clear payment terms in place at the start of every relationship and introduce measures that discourage late payments, such as reasonable late payment penalties.
Additionally, always ask new creditors to return a signed copy of your payment terms and conditions document. This will serve as proof that they have agreed to work to payment timeframes that pose less of a risk to your business.
3. Don’t buy – lease instead
Leasing equipment and assets is an often-forgotten-about strategy. Leasing can feel uncomfortable to business owners who have, up until now, had the means to buy outright – but it’s often a much more affordable and manageable way of ensuring a business can continue to operate as normal, whilst keeping cash in the bank for longer.
Lease agreements exist for all kinds of assets, from larger resources like cars and properties to everyday machinery and IT equipment, not to mention other corporate essentials like office furniture. The benefit of renting goods rather than buying them is that you will only have to make smaller monthly or quarterly payments in place of spending a significant amount of money upfront. You may also be able to claim back a proportion of the tax that’s levied against these monthly payments.
4. Find a way of injecting extra cash into your business
Invoice financing companies will provide funding against your unpaid invoices. They do of course charge for this service – but they can provide you with a fairly low risk means of raising cash quickly.
Alternatively, you could look to secure a short-term loan with a bank or an independent lender, or seek a cash injection from a new investor or via a peer-to-peer lending scheme. Your FD will be able to talk you through your available options and help you settle on a way forward that makes financial and strategic sense.
5. Increase your prices
We understand that many of our clients can be reluctant to implement price increases, as doing so may encourage otherwise loyal customers to consider looking elsewhere for more competitive fees. But it’s a viable and often vital option when rising costs are cutting into profit margins and leaving less cash in the pot.
In many cases, customers will be less resistant to price hikes than you think. Most will understand that fees need to rise incrementally in line with inflation, changing tax laws, and other factors – and, as long as they are satisfied with the service they receive, many will be willing to take additional costs on the chin instead of going through the rigmarole of choosing a new supplier.
The key to rolling out successful price rises is to ensure that your new fees still reflect excellent value for the work you deliver. You can provide perceived value by bundling your products or services together differently or changing the way you describe your offering to set new expectations.
Remember, too, that higher prices tend to attract better quality clients. Many of the problems associated with negative cash flow – such as late payments or unreasonable payment terms – could be avoided by being more discerning about the kinds of partnerships you create. Price increases will help to steer your company away from working with unreliable or unreasonable creditors, and in turn, solve many of the issues that led you to this point in the first place.
For more information on fixing your cash flow, or to get help implementing any of the above advice, contact the experienced finance directors at Dartcell today.