Seven top tips for improving your cash flow and profitability
Positive cash flow is critical to the maintenance and growth of a business. In fact, Richard Branson said: “Never take your eyes off the cashflow because it’s the life blood of business.” So, with that in mind, I thought it might be helpful to share my seven top tips for improving your cash flow and profitability:
1). Make sure your invoices are accurate and contain all relevant information so that it’s easy for your clients to pay you. And send them out promptly – running a business is demanding I know. There are many calls on your time but prioritise getting those invoices out. You can’t get paid until you do!
2) Take a deposit for large jobs where possible, to at least cover the cost of your materials. It’s not your responsibility to fund somebody else’s project. And when you’re working on multiple projects it becomes impractical to do so. It’s also worth invoicing large jobs in stages. These steps limit your potential financial exposure.
3) Consider using invoice factoring –this enables you to raise the funds against your invoices and have them in your bank account almost immediately. The factoring company takes a small fee but they are then also responsible for chasing your client for payment if it’s late so do consider all angles before going down this route.
4) Make sure you are paying VAT on a cash accounting rather than accrual basis. This means that you only then pay VAT on monies received rather than the amount you have invoiced in the quarter. Making this small change made a huge impact on a client’s business recently.
5) Implement a process to chase late payments – Xero can do this automatically as you can set reminders to be issued at regular intervals until payment is made. Also make sure that the correct legal wording is included on these email chasers, and always follow up with a phone call as well.
6) Make sure you have written terms and conditions in place from the start of a project. These should set out how you’ll work with your client including payment terms and what happens in the event of late or non-payment. They set a professional tone for your client interaction and provide cover for you if something goes wrong.
7) Use a cash flow forecast tool to give you visibility of when payments are going out of your business and when they are due to be received. This can help you plan the flow of money and ensure that your bank account stays in credit!
I hope these tips are helpful. Some of them will be more suitable to your business than others but it’s amazing what a difference some small tweaks can make. We recently helped a client implement a series of changes designed to improve cashflow and he’s been delighted with the results:
“Having a cash flow forecast in place made things so much clearer and taking deposits up front has made a massive difference. I didn’t think people would agree to it as first, but that hasn’t been the case at all,” said Callum Robinson, RPS Kendal Ltd.
Most businesses do not fail because of a lack of business, but due to poor cash flow and profitability. So, the first priority is to make sure your jobs are profitable, the second is to make sure the money is in your bank account as quickly as possible!