Given that poor cash flow is a common cause of business failure, it is essential to keep on top of it. Below are some key areas to review.
Set up an agreed overdraft
Your bank may be willing to agree or extend an overdraft limit but this will depend on your current and historic use of bank facilities and your relationship with your bank. It may want to see management accounts and projections to assess future trading performance, so you should ensure that accounts are presented in a user-friendly format and that projections are kept up to date.
Manage creditor finance
Creditor finance is achieved by extending credit terms with suppliers. However, unilaterally altering payment terms might have a disastrous impact on the continuing supply of goods or services. Suppliers with whom you have a close relationship may be willing to grant more favourable terms, but possibly only for a short period. These agreements tend to be informal and can be withdrawn without notice.
With favourable interest rates available there may be opportunities for refinancing loans. The cash flow benefit of repayments on a new loan with a lower, fixed interest rate may outweigh the penalties of early settlement of a higher rate loan. Again, loan providers will want reassurance about the future performance of the business.
Monitor work in progress
Aim to keep unbilled work to a minimum and remember it is easier to invoice work that has just been done. Besides, most clients prefer to deal with a series of small regular invoices rather than occasional large ones. By helping clients to manage their cash flow, you will help yourself.
The key to surviving is to update the business plan and focus on basics: cash flow, debtors, costs and creditors
If it looks as if costs on a project will exceed budget, speak to the client to agree a revised billing and payment schedule. It is important to manage clients' expectations, not only on delivery and work quality, but also on fee arrangements.
It is absolutely essential to keep a tight rein on debtors. Fees and disbursements should be billed promptly and regularly, and procedures put in place to ensure that money is collected on time or chased as necessary. Do not forget that you are giving clients interest-free credit while waiting for them to settle invoices.
Smaller firms may not employ a full-time credit controller, so give a particular person responsibility for sending reminders and making prompt follow-up phone calls if required. Alternatively, get those in charge of a project to monitor fee payment and follow up with clients.
Monitor cash flow forecasts
Regular reviews of your cash position are essential, and ideally should be done every week. The cash flow statement is based on information taken from the income and expenditure budget and makes assumptions about the receipt of fees, payment of suppliers, capital purchases, tax payments and partners' drawings or directors' salaries.
Of course, forecasting can be difficult, but the key is to compare budgeted figures with what actually happens and to act on those results. The cash flow forecasts should also be continually updated for actual results and rolled forward on a weekly or monthly basis.
Chris Pomroy and co-author Claire Brown specialise in audit and business services at Smith & Williamson Chartered Accountants.