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Pegasus Blog

10 tips to boost cash flow and profitability

DATE

March 31, 2014

Cash flow – the ability to generate enough cash at the right time to meet liabilities - is one of the most common inhibitors of business growth and a key reason for insolvency, affecting profitable and unprofitable companies alike.

According to research almost half of UK businesses are concerned about cash flow, with 46% reporting cash flow setbacks within the last 12 months.

If you look at a typical manufacturer as an example, it is easy to see how setbacks in cash flow can occur. The manufacturer might buy raw materials on credit before manufacturing the goods before they become stock. These goods are then sold on credit which depending on the payment terms, might be anything from 14 days to three months. During this time, they must pay for overheads and wage bills. If customers pay on time then this cycle is very efficient. Unfortunately in the real world, creditors can be slow to pay and when delays occur, the cycle breaks down.

As we move into a phase of economic growth, the ability to accurately anticipate cash flow has never been more important. Although you cannot always control when customers pay, the good news is that through instilling greater rigour and diligence across the order cycle, a huge step change can be achieved. Here are our 10 tips for improved cash flow:

    1. Where possible capitalise on financing options such as loans to help mitigate against the impact of cash flow volatility.

    2. Run regular credit checks on your customers. Circumstances can change quickly, so ideally this should take place every six months. 

    3. Ensure you know the history of your largest customers. For example if directors have a history of bankruptcy, a degree of caution may be necessary.

    4. Be bold. If a customer regularly defaults on payment terms, are they worth the resources it takes to service them and chase down payments? It might seem counterproductive to turn away business but could positively impact the bottom line.

    5. Consider your credit terms and consider introducing 14 day payments or small deposits for the largest customers. Look into offering a small discount for early payment. 

    6. Invest in a robust Financials software which generates invoices automatically and in a timely manner, provides alerts when payments become overdue, and facilitates immediate action to recover debts. 

    7. Ensure you have a clear credit control policy in place and create standard letter templates to recover late payments. 

    8. When chasing payment, always act appropriately. Be firm, polite and diplomatic. 

    9. Monitor your cash flow closely and in real time. Dashboard applications will give you a clear picture and in an easy to understand format, helping you prepare for things going wrong. 

    10. Review cash flow processes and resources on a regular basis and set realistic targets to ensure continued improvement.

The nature of business means that certain events will always fall outside of your control. However through adhering to the above suggestions, you will substantially improve your cash flow, reduce risk, and be well positioned to capitalise on business growth as the upturn continues to gather pace.

For more information on how the right Financials solution can help manage cash flow in your business, take a look at Opera 3 and the Credit Management Centre.