Cash flow management tips for SMEs

POSTED: 25th April 2014
IN: Guides

It is often said that cash flow is the lifeblood of any business, the grease that keeps the various cogs and mechanisms of the operation running smoothly.

It is often said that cash flow is the lifeblood of any business, the grease that keeps the various cogs and mechanisms of the operation running smoothly.

Effective cash flow management is of great importance to firms of all sizes, but it can be very difficult to get right. undefined

So what policies and strategies can small and medium-sized enterprises (SMEs) put in place to ensure this aspect of their business is in tip-top condition?

Crack down on late payments

For SMEs that are heavily reliant on individual clients and pieces of business, late payments can be crippling.

In January 2014, the Federation of Small Businesses (FSB) released a report revealing that more than half of its members had been paid after the agreed payment date by large companies last year.

Of the firms that had experienced this problem, just over a third (34 per cent) suffered reduced profitability, while 32 per cent had consequently paid their suppliers late and 29 per cent thought the growth of their business had been restricted.

John Allan, national chairman of the FSB, said: "As the economy gets stronger we must do everything we can to help businesses and late payment is an issue the government and large businesses must tackle.

"Small businesses simply can't be expected to lend interest-free to their large customers, which is in effect what extended payment terms and late payments results in."

The FSB urged the government to consider strengthening the Prompt Payment Code to make it mandatory for large organisations to clarify their payment terms and agree to pay quickly.

Smaller companies can increase the likelihood of receiving their money on time if they agree terms upfront and, if possible, offer an incentive for early payment.

It is also important to be organised with invoicing. Prompt action in this area will make it more likely that your clients and customers are similarly punctual.

Make the most of technology

The ceaseless development of technology means there are often new digital tools and facilities becoming available to help businesses.

There are many applications on offer to provide support with cash flow management, such as the Basware and Tradeshift software platforms, which allow users to issue or pay invoices securely online.

Andrew Jesse, vice-president of Basware UK, told the BBC that late payments can often be attributed to breakdowns in the process, such as the customer not receiving an invoice, or the wrong address being used.

"But e-invoicing gives the supplier certainty, and if there are queries on the invoice, these can also be dealt with electronically," he added.

Other hi-tech amenities include the Zapper Scan-to-Pay app, which attaches QR codes to invoices, allowing customers to scan the code, see how much they owe and make a payment.

Businesses can also make the most of tools such as Google Drive and cloud storage to ensure that relevant data regarding cash flow, payments and invoices is available to those who need it at the click of a button.

Put clear policies in place

It is important for businesses to introduce some consistency into their day-to-day operations by sticking to clear policies.

Following guidelines on how much credit can be extended to customers, for instance, will make it easier to keep track of how much you are owed and to anticipate payment dates.

When payments are overdue, make sure you always follow the same procedures when chasing them up. This will ensure that all clients are treated fairly, and will also make the process easier by outlining the appropriate steps that need to be taken at certain times.

According to business software provider Intuit, it can also prove beneficial to have a policy of asking some customers - particularly new ones - for deposits.

Incomings and outgoings - equally important

Small businesses that are just starting out might find it tempting to focus more on the money they have coming in than their overheads, but balancing the two is key to effective cash flow management.

It is imperative to have a clear idea of your expenses, and to find a standardised and consistent way of covering these costs.

One potentially useful approach is to contact suppliers or creditors to set up a system of spreading payments over a period of time, to even out the financial burden. If you ever get into a situation where you feel unable to make a payment, be proactive and contact the relevant supplier to attempt to find a resolution.

One simple method of optimising cash flow, according to Intuit, is to pay invoices on the day they are due. This reduces the risk of early payments leaving you low on cash at inopportune times, but it is important to be diligent to ensure you don't miss the payment deadline.

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