Maximum sleep with minimum effort - sorting out your cash flow

Partner at international accountancy firm, Mazars, Adam Simpson, talks us through the steps City Region SMEs can take to improve cash flow. Take it away, Adam:

I tend to find that people who set up and run their own company really enjoy the front of house activity; developing and making great products, promoting the business, building relationships with new customers and making the sale. What entrepreneurs find less attractive is what I call the ‘middle and back end’ of the business process; the administration and systems. It’s just not as much fun as winning the next big sale.

However, as an accountant, I am of the opinion that: a sale is not a sale until the money is in the bank. Research shows that late payment is the cause of 31% of cash flow issues for SMEs; not managing cash effectively can be the Achilles heel of many a good business.

The embarrassment factor

I think social awkwardness plays a big part in not chasing the payment of invoices.

Understandably, if you've spent time and energy building a relationship with a customer, it can feel uncomfortable to change the tone of the conversation and start demanding payment if their account is not being paid. Moving from business owner role to credit manager can prove to be an awkward transition.

It's important to remember that by accepting late payment terms, you are effectively loaning money to your customers – you are funding the development of their business - and probably paying interest for that pleasure. By getting paid in a timely manner (under 45 days) you can make a substantial difference to your bottom line.

A late payment is a loan to your customer

We worked with an IT business that had an annual turnover £4.5m. They had 100 customers who were late payers, amounting to £1m owed to the business. The company were borrowing against this debt to maintain cash flow and paying interest for the privilege. The solution we delivered was to reduce the time it was taking to get paid.

By confronting this issue, the company was able to reduce the amount of cash tied up in unpaid invoices (or interest free loans to customers as I view it). This resulted in the company putting £310,000 back in their bank, reducing borrowing by £270,000 and saving £7,000 in interest.

It’s clear that by reducing delays, funds can be put back in the business and you can stop needlessly spending money on interest, thus enabling you to more easily deliver your business plans.

Are you being pulled in too many directions?

Growing a business is really hard work, often requiring an owner to perform multiple roles. Sometimes this means you’re not always able to keep an eye on whether the cash is actually coming in or not. If a business owner is pulled in all directions, the default setting can be to go to their bank to ask for more cash. However, this is a Catch-22 as it costs more money in the long term.

A fresh pair of eyes

We worked with a building supplies company who were really struggling with a back log of unpaid invoices. There were a lot of queries from customers that slowed down payment times.

On review of the systems and processes within the business it turned out that the problem was quite simple. It related to how they loaded their trucks! The trucks were loaded at night and the paperwork sorted for that amount of pallets. If it rained, the bricks on the pallets would get heavy, so some would be removed in the morning, leading to a discrepancy between the paperwork and what the customer received. Of course the customer queried the invoice and this was causing the delays! A simple change in systems can make all the difference, but sometimes you need an outsider to highlight this.

Don’t be afraid to bring in help

An option for business owners who do feel overstretched is to outsource this area of the business. An outsourcing company has the time and critical mass to chase the payments, whilst maintaining a focus on customer retention.

- Adam Simpson

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