Manage Cash Flow to Succeed
Why Cash Flow is King
- 82% of businesses that fail do so because of cash flow issues.
- 50% of new businesses cease trading in less than three years.
- Businesses that intend to survive must pay attention to cash flow, right from the start.
- Here’s HomeForce’s “Must Do’s” to maintain a positive cash flow
Send invoices immediately
- Send an invoice and receive payment for it while still on site when possible
- If not possible to get payment on site then ask the customer to approve / sign off your invoice while you are still on site.
- At worst send an invoice on the same day.
- Do this for all jobs, not just the big jobs.
Shorten payment terms
- There is no such thing as “standard terms”.
- Payment terms can be anything you choose. They are a condition of you agreeing to do work.
- Keep payment terms to “Payment on completion” or “Payment Within 7 days”
- There’s no need for terms to be any longer. The work has been completed; it’s time for the customer to pay.
- Shops on the high street don’t offer payment after 30 (or even 60) days.
Make payment terms clear from the outset
- Include them on websites, emails, quotes & estimates
- It’s too late to do anything about it if they are just on an invoice
- Be clear what the penalties will be for late payment
- Customers are agreeing to terms when they instruct work as long as those terms are clear from the start.
Follow up late payment immediately
- This doesn’t mean send an aggressive text or email.
- Have a politely worded email or letter template ready to send
- Follow up further late payment a maximum of three days later. Use another polite, but more strongly worded email.
- Include a phone call (and keep a record of it) at this stage.
Use accounting software
- It keeps track of money in the bank, how much is owed and how much will be due to be paid to suppliers.
- Some accounting packages track payments and send payment reminders automatically
- An accounting package will also reduce time spent doing admin and reduce accountants charges.
Keep your accounts up to date
- At a minimum enter all expenses and invoices from suppliers twice per week.
- Check bank balances daily to avoid going overdrawn and incurring charges.
Take payment for materials up front
- Some customer are suspicious when asked to do this.
- But you are a small business, you can’t afford to provide free credit.
- Once customers have paid for materials give them a receipt listing what they have paid for.
Alternatively ask the customer to pay the supplier directly
On some jobs materials can cost a substantial amount and the supplier may ask for payment before the customer pays. Small businesses can’t afford to subsidise customers in this way.
Agree a payment schedule
- For longer lasting jobs take payments in instalments while the work progresses
- Draw up and agree this payment schedule (based on the proportion of work completed) before work starts.
- If a customer withholds full payment at the end of a job for a minor issue then not having taken payment by instalments can lead to major cash flow problems as suppliers and sub contractors will expect payment.
- In the payment schedule include a small retention (5 – 10%) payable a set period after work is completed satisfactorily. This allows the customer long enough to discover any faults and is an accepted practice in law (See “Scottish Minor Works Contract”).
Avoid fines and credit charges
- There is a saying that money is the most expensive thing to buy so avoid having to pay for credit when ever possible
- Keep VAT, PAYE, NIC and Pension contributions up-to-date to avoid punitive fines from HMRC.