Avoid running out of money

A business can survive for a short time without sales or profits, but not without cash. It is cash which pays the bills and allows trading to continue. If you are growing and extending credit to more customers, the need for cash is even greater.

The more warning you have of cash flow peaks and troughs, the more time you have to deal with them.

How to reduce the chance you’ll run out

Progress payments

When you negotiate contracts with customers be aware of setting payment terms that help your cash flow, such as deposits or progress payments. Negotiating stage payments for contracts that take months to complete has two purposes: it gives you cash flow to match your expenses and protects you from total loss on a project if the customer goes into liquidation.

Include a timetable for the customer to pay invoices as part of any agreement. Agree on clear milestones for the work to be completed to lessen the chance of the customer disputing any invoices.

Invoice immediately

Improve your sales and profit margins by making sure all your work is invoiced for as soon as possible. This may sound obvious, but many businesses neglect this task. Efficient invoicing can make a real difference. With bigger customers you need to get into the customer’s payment cycle as soon as possible.

If you are asked to do more than the original quote then it is reasonable to negotiate additional payments. This makes it important to specify in the initial sales contract exactly what you will deliver.

Raise cash quickly

If you need to improve your cash flow temporarily, adjust your sales and marketing plans to suit. For example:

• Bring forward sales by offering customers incentives to purchase quickly.
• Bring forward payments by offering early-payment incentives (such as discounts).
• Focus your marketing on short-term lead generation, rather than longer term objectives like brand recognition.

Commission on payment

If you pay sales commission, link it to receipt of payment rather than receipt of order. This gives you a double cash flow benefit:

• You delay payment of the commission.
• Your sales people will persuade your customers to pay promptly.

Credit control

An efficient credit control system speeds up your cash collection and reduces bad debt. It also saves time and demonstrates to your lenders and investors that you run your business professionally. Some pointers:

• Credit check all customers before you extend credit terms.
• Control how much credit you provide and to which customers. Consider using credit scoring systems and setting appropriate credit limits for all customers.
• Avoid giving any customer more credit than you could afford to lose if the sale turned into a bad debt.
• Send out invoices immediately after you have supplied the goods or service. If appropriate, make a follow-up call. Confirm that all the invoice details were correct and that there will be no problem paying it by the due date.
• Monitor late payments and chase them up methodically, largest debtors first.
• If you intend to charge interest on late payments this must be stated on your terms of trade.

Using a debt collection agency, or a specialist attorney, can be an effective method of dealing with non-payers.

Controlling expenditure

Shop around, so you know the prices and service that you should insist on from your suppliers. Consider whether you could make savings by purchasing some types of capital equipment second hand. Two questions:

• Do you really need the equipment?
• Can you lease or rent the equipment? Discuss the options with your accountant or financial advisor.

Implement simple cost control systems across your whole business, to identify scope for cost savings. For a start, four types of savings can usually be found if you investigate:

• Unnecessary costs, such as heating your premises at night (if no one is there). Audit your business to identify what could be turned off, re-used or cut down.
• Excessive costs, such as paying more for services that can be sourced more cheaply.
• Inefficiency, such as paper-based systems which could be managed through the computer.
• Missing any volume buying or early payment discounts.

Stock control

If you hold stock, good stock control can release substantial sums of money:

• Aim to hold just enough stock to service your customers on an on-going basis. Identify seasonal peaks and troughs.
• Set a target stock-turn (such as six times a year), then monitor your performance.
• The faster your suppliers can deliver to you, the less stock you need to hold. If possible make your suppliers your warehouse and let them bear most of the stock holding costs.
• Focus on your top selling items. Consider selling off any slow moving, old or obsolete stock to raise extra cash.

New funding

You need a solid financial base to underpin the cash flow of your business. Take full advantage of the different types of finance available:

• Speak to your bank about the various types of finance available to your business. Overdraft and loan finance may be limited by the security you can give the bank.
• Factoring and invoice discounting allow you to raise finance based on the value of outstanding invoices. Growing businesses in particular often find that factoring provides a good source of working capital and eliminates the need to chase up overdue payments.  
• Consider using asset finance to purchase computers, vehicles, plant and machinery. For example, both hire purchase and leasing allow you to spread the cost of the acquisition, with the asset itself providing the main security.

A strong capital base of equity finance (and directors’ loans) is vital when a business starts up. Subsequent injections of equity finance can help you achieve step changes in the growth of the business, for example, if you need extra finance to buy another firm or open a new factory.

Consider generating cash by selling off underused assets and leasing them back. Before doing so check whether it will result in a profit or loss, otherwise you risk generating cash flow to the detriment of your profit and loss account. Get advice from your accountant or financial adviser to understand all the implications.

Next steps

Work through this list of good business practices to reduce the chance of running out of money:

• Don’t take on financial commitments before you can afford to pay for them.
• Avoid speculative work in the hope that a customer might then purchase what you have produced.
• Have a funding plan in advance for any major expenses that you know are likely to happen.
• Forecast cash flow on a regular basis.
• Have clear agreements with customers to avoid any disputes
• Ensure you have an effective credit control system