Five reasons businesses have poor cashflow
All businesses need a healthy cashflow to thrive – the old adage “cash is king” is as true now as it ever was.
So here are some of the main reasons businesses have poor cashflow:
1. Focussing on turnover not profitability – Most of us have heard the expression “turnover = vanity, profit = sanity” but most business owners will have chased that “big order”, focusing on the headline value or perceived prestige of the headline sales value at the expense of profit. There is no point is simply adding turnover without confidence that every £1 added is also contributing an adequate level of profit. Ask us about our simple tool for measuring the impact of small pricing adjustments on overall results.
2. Not issuing invoices promptly – Your suppliers, employees and contractors all expect to be paid on time. If you aren’t issuing your sales invoices promptly how can you hope to generate enough cashflow to cover your outgoings? Add the possibility of possibility of slow payment by your customers and you could very quickly run out of cash. In many cases it is possible to automate the issue of sales invoices immediately work is completed.
3. Lack of systems of financial control – Poor financial systems can make it hard to keep track of what you are owed and by whom. This makes the task of collecting what you are owed more difficult than it need be and could eventually lead to bad debts. With modern accounting systems it is possible to produce clear reports on what you are owed virtually in real time.
Your financial systems should also be sufficiently well developed to allow you to anticipate demands on cashflow before they arise. That way, if there are problems ahead you can negotiate banking or other facilities well before they are needed – remember, banks don’t like nasty surprises and are much more likely to be supportive if you can show that you are anticipating and working to overcome problems before they arise.
4. Not invoicing on account of large jobs – In many industries it is standard practice to seek deposits, advance payments or payments on account as work progresses. Even if this is not the norm in your industry you should never be shy of seeking progress payments if you’re going to be undertaking a large amount of work over a period of time. Seeking your customers’ agreement to stage payments based on completion mileposts and including these as part of your terms of business will minimise your financial risk.
5. Poor credit control – Make sure you check the creditworthiness of new customers before you start work. We have systems to help you with this. Once you’ve established their credit rating set a limit you’re happy with, make sure you share this with them and most importantly, stick to it. Ensure you maintain regular contact with customers and promptly chase debts as they become due.
If you use one of the main cloud accounting systems you will be able to “bolt on” automated systems for issuing reminders and chasing debts.