Money in and money out: the only cashflow figures that matter

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By Chirag Shah, CEO Nucleus Commercial Finance

As small businesses across the UK work over-time to settle their annual accounts, for all the various spreadsheets and ledgers, there are really only two key line items – money in, and money out.  This ebb and flow gets more complicated as the business grows, though healthy cash flow can be an issue for almost any size business, and in any industry. When you lack funds at a crucial juncture, it can be disastrous: if you’re a successful business, a temporary financial gap can halt your growth; if you’re struggling, it can snuff out any hope of recovery.

One of the biggest barriers to smooth and healthy cash flow is late payments. Some recent research we conducted revealed that on average, invoices are not paid until 74 days after being issued, despite typical 30-day payment terms.

Of the 96 sectors analysed, it was only employment agencies that paid their invoice within 30 days on average. Just 12 sectors, including education and construction, managed to pay invoices in under 45 days. From the 129,000 invoices analysed, the worst performing sectors were membership bodies including trade bodies and other subscription based organisations. If you sell goods or services into this sector, you may well be in for a wait of more than 137 days – over four months – for payment.

The key mantra that I would advise businesses to repeat to themselves when thinking about cash flow, is “it’s not a sale until you have received payment.” I would also emphasise the importance of real honesty when putting financial forecasts together – even if the numbers on the screen aren’t quite what you were hoping to see. If you can see that sales are dipping for example, due to seasonality, that is the time to think about whether you might need to seek external finance. Acknowledge, and then act quickly. It’s much easier to get money when you don’t need it.

Small business owners in particular face a huge number of competing priorities on very limited time, though a proactive approach to financial planning must remain at the top of the list if they are to thrive as a business. It’s a case of taking control, and managing the business with as much care as you would your personal finances.

To help prevent a cash flow problem, small businesses should take care that they are set up to invoice clients accurately, ensuring that they are billing the correct entity with the correct details. After a sale takes place, don’t be afraid to be proactive in following up with the client. Indeed, the longer a debt goes unpaid, the more likely it is it will remain unpaid. Of course, maintaining a strong relationship with the client is a good way to increase the likelihood that they will pay you on time. Take notice of those that do, and thank them – it won’t go unnoticed.

If you do find that payments are late your first question should be ‘why?’ Be sure to look at any internal problems. Perhaps you have a faulty product or service – speak to your client to figure out the issue so you can do everything within your power to resolve it quickly. Similarly, check to see that these late payments are not causing further issues for your business. Be aware of how many sources you are borrowing money from. Repaying loans with interest to numerous people can leave a business running even harder to catch up, yet still falling behind. If you plan far ahead enough in advance, you may not need to rely on short term loans to deal with late payment cash flow issues.

We all need to take responsibility for timely business to business payments to create a prosperous and fair ecosystem. Within this conversation, it’s important that we address both long payment terms and late payments – equally concerning, but separate issues. Without a commitment to address these topics head on, we risk stunting and stifling the UK’s businesses.

  • David Lewis

    Nice article. I wholeheartedly agree that the first place to look to improve cash flow is within your own business. Decent invoicing and credit control together with early warning systems can go a long way!