You can quickly increase your business cash flow by fixing or improving some of those basic financial management processes. Here are my top 10 areas which more commonly need fixing.
Often these are not addressed or even considered because they can appear to be ‘just the paperwork’. However, the ramifications of not setting these up correctly can be hugely harmful for the cash flow of your business. You need to train your staff and understand these areas so that you optimise your cash collection process.
Furthermore, using the financial reporting in your business is key. Understanding what reports are available from your accounting software, will ensure that you are optimising the way your staff collect the cash as well as pay-out cash to your suppliers.
Here are the 10 most common areas I have found, cash can get held back from your business.. Fix these poor financial processes and you will get the cash flowing quickly back to your business.
1.Check your Aged Debtors report.
Ensure there is no old customer debt or part payments that are still outstanding, by using your Aged Debtors report. Make sure your staff are using this report and understand its relevance in giving you the hard figures of what is due from your customers.
2. Check your invoicing dates.
Make sure you are invoicing for all goods delivered or services delivered in the correct month. A simple delay in one day between the 31st and the 1st of the month can give your customer an extra 30 days credit on paying you.
3. Check your Payment terms with your Customers.
When negotiating payment terms with customers, make sure you set the payment due date as 30 days from date of invoice. A customer may request 30 days from the end of the month of invoice but this will give up to an additional 30 days credit. Be clear on what you are allowing and make sure that your sales staff understand this as well! A Sales Rep hungry for the sale can inadvertently give away huge amounts of credit by not understanding payment terms.
4. Set a Credit Limit with your Customers
When agreeing payment terms, it is also wise to set a credit limit with your customers. This overrides any payment days. Once the credit limit is reached, an immediate payment will be required from your customer before they will be allowed to place any further orders.
Don’t let your business be used as a bank. By giving customers unlimited credit you lay yourself open to risk and months of waiting for cash to be paid. this is especially dmamaging for your business when you are paying out for the inputs straight away in terms of payroll and raw materials.
5. Contact Customers Before the payment from them is due
Check with your customers, before they make payment to you. A phone call atleast 2 weeks before the payment due date should be made to check that they are paying you all the invoices that are due. Cross check the amount that is due to you with your Aged Debtors report.
Don’t just assume that they are paying you correctly. By speaking to them before they make the payment and ensuring they have all the invoices from you, you avoid having to wait for their next payment run to make any necessary corrections.
6. Have a Payment schedule agreed with all longer-term contracts with Customers.
Often the customer can hold up your project, especially for those of you with businesses in the service sector. Holidays, absenteeism etc can lead to payments being delayed as work is held up at the review or information provision stage. To insure yourself against this, make sure you have a predetermined payment schedule in place so that payments are not affected if your milestone achievements are reached.
Better still request an upfront deposit to start work on a longer-term project.
7. Check the Supplier Payment Due dates
Only pay suppliers when they are due for payment. Sounds obvious I know but are you checking that your bookkeeper/ admin staff are working to this rule? Make sure they are logging the due date as per the agreed payment terms with the supplier or per the invoice due date that is shown on the invoice from the supplier.
8. Check out Negative balances on the Accounts Payable Ledger
If there is a negative balance on your Accounts Payable ledger this implies that an overpayment has been made. Make sure you deduct this amount from your next payment to your supplier or better still ask for a refund.
9. Ask for a Direct Debit Payment to be set up.
If you supply a regular service then it is a good idea to request that a direct debit is set up. This ensures that the payment is made every month at the same time. As we all know, when cash flow problems start, a business will try to pay its suppliers late. Those paid by direct debit are less likely to be subject to this as this is an automated payment not requiring any monthly intervention.
10. Reconcile your Sales Invoiced.
You need to have some way to verify that all the goods or services you have provided are invoiced to your customer. I know this sounds obvious but again, because the roles of selling, booking goods out and raising the invoicing are all segregated, it is not inconceivable that a sale is ‘lost’ somewhere. This will not be picked up if you have no way of checking that your sales invoiced is correct. Likewise, where instructions are given to raise credits you will need to check that only one credit is raised and duplicated credits are not included in existing invoices.
I have worked with many small businesses in my time of providing Financial Controller services. The 10 areas above are the most common areas where cash flow is impacted by poor financial management set up.
In my opinion, the main reason why this is happening is due to lack of skills and knowledge. If you have an office manager or a non-qualified bookkeeper in your business they are unlikely to understand the ramifications of some of their actions. They are processing and focusing on getting the paperwork done. They are not aware of the overall process and how this needs to flow to deliver the cash back to your business in the minimal amount of time.
If you need help with finding the right fix for your poor financial processes, why not contact me here for an informal chat.