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How to reach positive cash flow and stay there


Cash flow is the lifeblood of any business. Even the most profitable and fastest-growing company won’t stay in business if it can’t pay its bills and these sorts of companies are actually most at risk of a cash flow crisis.

Why? Because when you take on a major new customer, you will need to invest in people, plant and raw materials before you get paid.

So, what’s a positive cash flow?

In simple terms, positive cash flow means that you have more money coming in than going out. However, it’s not as simple as that. It’s when the money is arriving and leaving that really matters.

For instance, if you do a £2,000 job for a customer that costs you £1,500 to complete, you’ve generated a profit of £500. But if you have to pay out the £1,500 before you receive the £2,000 and you don’t have the cash on hand, you’ve got a cash flow crisis that needs fixing.

How is cash flow calculated?

To understand your cash flow, you will need to prepare a forecast. This is a document covering a set period, typically a year. It lists all your likely incomings and outgoings, logged against their respective due dates.

When preparing your cash flow, do not be tempted to be optimistic. By being realistic or even pessimistic, you stand a much higher chance of not hitting problems further down the line.

For example, if you have a client who is a delinquent payer and typically takes 63 days, don’t assume they will magically start adhering to your 30-day terms.

Similarly, if you take on new customers, assume the worst when it comes to their payment behaviour. Equally, don’t be tempted to underestimate your outgoings.

You may get lucky and have a year when no equipment fails and needs sudden replacement, or when your suppliers don’t put up their prices, but don’t bank on it. Always assume the worst. That way the only surprises you’ll receive will be pleasant ones.

Online accounting is your friend

By using a professional online accounting system such as Fresh Books, all of the heavy lifting will be done for you. You simply need to enter the figures and the projected dates.

At a glance, you’ll be able to see what you have coming in and going out in a month, six months or a year and you’ll be able to anticipate any pinch points (which may well occur when VAT or corporation tax is due) and plan accordingly.

So, what can you do improve your cash flow?

If you don’t like the results you’re seeing in your accounting package, or even if you do, there are a number of steps you can take to boost your cash flow.

1 Get paid faster

This is the big one. With cash flow, it’s not simply a question of what your customers pay but when. Yet you’d be surprised how many small businesses are tardy to issue invoices, preferring to concentrate on revenue-generating activities. In fact, a recent article from the Wall Street Journal highlights that the largest U.S public companies have deliberately increased payment delays to 56.7 days to help unlock their own cash.

Put simply, the faster you invoice, the faster you’re likely to get paid and once again, an accounting package can help you by enabling you to do everything online and in real-time.

Similarly, it may be possible to change some customers’ behaviour by adopting a carrot-and-stick approach. By offering a small discount (let’s say 5%) and adding statutory interest for payments exceeding 30 days, a delinquent customer could become a very prompt payer.

2 Don’t let debts accumulate

Here’s a disturbing fact. The more overdue your debts become, the less likely you are to get paid at all.

When you have customers clamouring for your attention, it can be tempting to ignore your administration, but if your customers are slow in paying, you need a firm, escalating collections procedure to keep them in line. Your business could depend on it.

3 Consider invoice factoring and discounting

Invoice factoring and discounting can end the problem of late-paying customers permanently, by enabling you to borrow against the value of your invoices as soon as you issue them.

Most lenders will allow you to borrow around 85% of their value, meaning you effectively get paid immediately. As the name “invoice discounting” suggests, the finance company will then take a proportion of the balance in return for providing the service.

With factoring, the finance provider will assign experienced credit control professionals to secure early repayment, thus minimising your interest (ideal if you don’t have a dedicated accounts team). Whilst with invoice discounting you will continue to chase up your own payments (perfect if you don’t like the idea of having your customers dealing with a third party).

4 Reduce your outgoings

Of course, money coming in is only one side of the cash flow equation. You also have to consider what you’re spending. If you can reduce your outgoings, you can transform your cash flow.

This can be easier than it sounds. For instance, if you’re not using every square foot in your premises, you could consider moving to a smaller and cheaper location.

If you have equipment you’re no longer using, then you can sell it. And if you haven’t renegotiated your rent, bank loans or overdrafts, utility bills or telecoms arrangements for a while, there could be considerable savings to be made by changing supplier – or even staying put.

5 Renegotiate your terms of business

Naturally, you want your customers to pay you as quickly as you can, but you also want to pay your own bills as slowly as possible.

By negotiating with your suppliers, you may well find that they are willing to change the terms of your business with them. Accepting payment after 45 or even 60 days rather than 30 or giving you generous volume discounts as your company grows. The effect on your cash flow can be enormous.

Once your cash flow is positive, how should you keep it that way?

There’s a frequently misattributed quote that “eternal vigilance is the price of liberty”. However, few people would argue that constant vigilance is certainly the price of a positive cash flow.

In other words, once things have improved, don’t take your eye off the ball. Keep forecasting and keep assuming the worst.

Keep updating your cash flows dynamically. As soon as anything changes so you know your real position now and your likely position in 12 weeks or 12 months.

Keep looking for ways to invoice faster and get paid quicker. And of course, keep finding new ways to reduce your outgoings, which will improve both your cash flow and your profitability.

By doing all the above, you should be able to keep paying your bills and most importantly, keep yourself in business.

Carl Faulds By Google+ |