Your business could be increasing sales dramatically, but it doesn’t mean much until the money is safely into your bank account. One of the main issues facing growing businesses is managing their cash flows whilst waiting for expected income to be received.
Ideas on monitoring your cash flows:
- Calculate your average debtors days using the formula below:
Debtors / Average Daily Sales
If the figure is close to your agreed payment terms, well done!
If the figure is higher, you have some work to do!
- Use/Create an aged debtors report to establish the time it takes each customer to settle their accounts – this helps identify any overdue and nearly due customers – these are your focus to contact!
- Check customer credit ratings. For new customers, you can check their credit score with a company such as Experian or Dun & Bradstreet, to establish the level of credit limit you should allow your customer to have early on in your relationship.
Ways to improve your cash flow:
- Make sure payment terms are clear in any communication and documentation received by your customers (including invoices). This gives them no reason for not knowing your payment terms.
- Include “Pay Now” options on your invoices, to enable easy immediate payment to settle your invoices. Stripe and Sagepay are examples of companies that provide these options.
- Communicate with you customers a week before payments are due. Are they ready to pay on time? If not, is there a particular reason for the delay in payment? Do you invoices need to have further information or be in a different format to speed up payment? You want your customer to know you are aware of the situation, and that late payment is unacceptable unless there are exceptional circumstances. If you don’t chase, you may not get paid!
- Offer early payment discounts, i.e. 2% for payment within 10 days. If you can afford this, it may make the difference to your customers.
- Offer payment plans to customers in difficulty. Flexibility for your customers help to develop long term relationships and support in return when you need it.
- Set and use late payment penalties for customers who persistently pay late.
- Set up retainer billing. Calculate the annual spend of your customer, and then invoice 12 equal instalments, which makes monitoring cash flow easier for yourself and your customer.
If you would like a FREE financial health check for your business, or alternatively support with cash flows, please contact Paul at Enrich Accounting here, on 07403 407455 or at firstname.lastname@example.org