– By Gavin Preston
Cashflow is good. Your bank account is looking healthy….and then ‘wham’ something happens that turns the cashflow situation on its head. Maybe you lose a big order / customer, the tax bill needs to be paid and no matter how much you had intended to put the money aside to pay the VAT, Corporation tax or your Income tax, as each sales invoice was paid, there was always something more immediate that the money was needed for. Now you are looking at a hole in the cashflow and a bank account that is heading towards its overdraft limit. What to do?
I have encountered this very scenario a number of times recently with clients. Here are some practical things you can do to turn your cashflow around:
Prepare and Maintain a Cashflow Forecast
Put together a cashflow forecast to show all of your predicted cash in and cash out. Show the amount inclusive of VAT (ie. the actual cashflows) and account for the VAT payments you will expect based upon the cash in and out. If you have a lot of cash in and out over the course of the month, I would recommend a rolling weekly cashflow for three months and then monthly cashflow for next 6 months. If the majority of your cashflows are on one day / week of the month then a rolling monthly cashflow for the next 9 months would suffice.
The simplest way of doing this would be to use a spreadsheet application such as Microsoft Excel.
There are other powerful tools on the market such as ProfitSee @MyProfitSee. Profit See links with Cloud Based Accounting Software such as Xero enabling your actual bank transactions to update your cashflow forecast. ProfitSee enables you to run different planning scenarios very easily. A powerful tool.
The main point is ensure a cashflow forecast is created for your business. Keep it up to date and review it regularly to minimise the chances of any surprises.
Collect in overdue invoices
Review your aged debtor report and actively chase any over due invoices. Put in place a system that the week an invoice is due for payment, a member of your accounting team calls the customer to check that your invoice is going to be paid, as planned, that week.
If you have customers that are paying your invoices later and later, or not at all, then call them and agree a repayment to pay your outstanding invoices off over the next two or three months.
Offer early settlement discounts to customers
Depending upon your margin on the product and the cost to you of waiting 30 or 60 days to get paid, offer an early settlement discount of e.g. 5% for invoices paid within 7 days or upon order confirmation.
Make a special offer
Set a target of how much cash you need to bring into your account over the next month and then put together a promotion on one of your products with an attractive saving for orders placed and paid for by the end of the month. Put marketing and sales effort behind the promotion with a real drive to secure those sales. Beware of doing this frequently on your best selling products as customers will wait until your next promotion and buy at a discount, thereby impacting your margin.
Raid your Piggy Bank
Consider putting some of your personal savings into your business. You could do this by making a short term directors loan to your business or you could increase your equity stake in your business.
Extend your credit facilities
Increase the amount of credit available to your business. There are a number of sources to quickly access cash now in addition to going to your bank to increase your overdraft facility or a short term loan. If you sell goods via Amazon or using Paypal, you can apply for a loan from either Amazon or Paypal and can have a decision within hours and the funds transferred to your bank. Consider invoice discounting or invoice finance. It is an expensive option but effective. Look for other providers other than the high street banks, whose fees tend to be at the higher end of the spectrum.
Agree repayment plans with your creditors
Whether it is a key supplier of yours or the VAT man, call them and explain your situation and ask if you can agree a repayment plan under which you will pay back your outstanding liabilities over the next three months. HMRC will not allow you do this every VAT quarter but, in my experience, will allow it occasionally. They will, however, want to see evidence that you have pursued other options to get the cash in to pay their bill.
Sell, Sell, Sell
It is often all too easy to incur more debt to provide more cashflow in the short term. The fact you have a cash shortage could be down to sales being too low in volume or margin or your cost base being too hire for the level of sales. i.e. your profit is too low or non existent. Getting cash into your account through taking on more debt is merely exacerbating the underlying problem.
Increase the sales activity of your business. Get your sales team to get back in touch with existing or previous customers, explore what their needs are and what you can do to help.
Increase your outbound marketing activity. Connect with target customers on Linked In and share with them articles that will add value to them to start to build a relationship. Deliver value first, then progress to a phone call.
Email your customer list at least twice a month with articles and videos that add value. Yes, it takes time but it is important to add value. Online marketing experts unanimously agree that the most valuable asset to a business and the most effective online marketing tool is your email list. Be sure that your emails are articles or videos that you expect will help your customer or prospect solve a problem or achieve a result they are likely to be striving for. Steer clear of sending out newsletters. Nobody has time to read your news. Focus on adding value. Use email marketing software such as Mailchimp, Aweber or Constant Contact to send out the emails to your list. Look at the statistics as to who opens your emails and interacts with your content by clicking on any links. Call the most engaged and see how you can help them.
Get Moving…take action
In my experience working with clients, a cashflow challenge can feel like a real crisis and fear creeps in. What if we don’t have the cash to pay the payroll at the end of the month? What if we can’t pay the VAT bill? What if ? What if? What if we go bust? These questions are understandable but not helpful. They promote fear and ultimately paralysis. Instead take massive action on the pointers above.
When you do so you will be surprised how things can turn around and in the nick of time you have the money to make payroll.
Keep focusing on the result you do want, a healthy cash balance.