Know your cash flow

If you’re running a business, the chances are you’ve been concentrating on cash flow like never before during the past 12 months.

Late payers and non-payment, cancelled overdrafts, extreme lending terms and shrinking markets have conspired to create brutal trading conditions, and the suspicion is that 2010 isn’t going to be that much easier. Here we speak to owner-managers to find out how they’ve manoeuvred to create additional headroom for their businesses.

1) Plan your cash flow
It sounds ludicrously simple, but the failure to plan ahead for incoming and outgoing costs remains one of the primary causes of company liquidations. Craig Mackie, managing director of graphic design company The Shine, realised his business had truly lost its lustre when he couldn’t afford to pay a £60 invoice. ‘The penny dropped that I had been thinking about my cash flow on a day-to-day basis rather than looking six months ahead,’ he says. By scaling down the company and implementing strict financial planning, Mackie was able to bring his business back from the brink. ‘Now we have spreadsheets that detail all our invoices and will indicate if we have a problem in 14 weeks’ time, rather than just realising when it’s too late to take action.’
2) Talk tough with your landlord 
Paying three months’ rent upfront can be a huge drain on cash flow. Graeme Marsh, managing director of personal fitness business Aegis Training, eased his company’s cash flow by arranging monthly payments. ‘Our landlord was very sympathetic and realised we were in a difficult position, so was prepared to make some concessions.’

3) Bring out the scalpel  
‘If you’re experiencing turbulent times, cut early and deep,’ says Paul Daniels, director of Involved Investors. ‘There’s no point in just chipping away at the workforce. You can always rebuild at a later point. We had to cut our sales team by nearly half last year, which was the appropriate move. Now things have started to recover, we have been able to build it up again.’ Obviously, this isn’t so easy if you’ve already made massive cuts and are almost running on empty.

4) Don’t believe the banks
Carol Hack, owner of property development company Clearwater, suddenly had her bank funding pulled earlier in the year, leaving her with £150,000 of bills to settle. ‘There was nothing wrong with the company. Despite the recession, our holiday homes were selling really well and we were very profitable. They just panicked and wanted to reduce their exposure in the property sector.’ By doing a lot of research, Hack secured alternative funding. ‘We found a Swedish bank that was prepared to back us because we had a squeaky clean credit history.’

5) Community care

If obtaining bank funding is simply not
an option, check out the Community Development Finance Institutions. There are more than 60 of these organisations in the country, providing loans and support to viable businesses in need of funding. Visit for more information.

6) Hound debtors

A recent poll by advisory firm Tenon Recovery found that 70 per cent of entrepreneurs are chasing debtors more vigorously to get money in. Edward Rimmer, chief executive of Bibby Financial Services, says companies should check that all their invoices are raised on time, with the correct terms and conditions in place. ‘Call up and confirm the client was satisfied with the work, as this is the most common excuse for non-payment. Once an invoice has been sent, call the client again and check there aren’t any disputes. Putting in all the admin work and making sure everything is in order is essential for preventing any problems.’

7) Study the ledger

While not the most thrilling of jobs, it might be worth checking to see whether suppliers have been paid twice. Duplicate payments aren’t as uncommon as you might think.

8) Check credit status

Having been burnt by bad client debt last year, Dave Breith, director of O-bit Telecom, says credit checking is now an integral part of his cash flow management process. ‘You really need to look out for the early warning signs. When people start asking for extended credit terms, you need to ask why. Earlier in the year, we refused to do any more business with certain companies that had outstanding payments with us until the amount they owed us was paid. In the end we lost the money, but we did reduce our exposure as one of those companies went bust.’ Breith now uses a credit-checking service as a way of ensuring that clients are able to settle their debts. ‘You don’t have to spend a fortune on credit agencies; you can do it all in-house with systems available through agencies such as Experian,’ he says. David Thompson, chief executive of Close Invoice Finance, agrees: ‘Make sure you do your research on who you are selling to, as bad debt is a major reason for companies falling into cash flow difficulties.’

9) Call in the heavy mob
Using a debt collection agency might be your best option if you are failing to recover outstanding payments. Stephen Lewis, former president of the Credit Services Association, says, ‘It’s something companies should think about using when they have exhausted their in-house procedures for chasing debt but don’t want to resort to legal action.’

10) Use freelance staff

James Blackburn, co-founder of energy consultancy Carbon GC, has found it useful to have a core of full-time employees while also using freelancers. ‘It’s really helped free up a lot of our fixed costs.’

11) Maximise value

The benefit of invoice finance is that it provides cash flow facilities against your outstanding sales ledger. Close Invoice’s Thompson recently enabled an alcoholic drinks company to receive funding through this facility. ‘Their profits were up but they needed to fill the gap between making sales for Christmas and receiving payment. Invoice financing provided a cash solution that would have been difficult to obtain through the bank,’ he says. Most invoice providers will advance you 80 to 85 per cent of the invoice value, with the remainder paid when the order is met. The majority of invoice finance providers will want all or the lion’s share of your invoices for a 1 to 2 per cent cut and an arrangement fee. Moreover, an invoice factoring company will also chase debtors on your behalf, effectively outsourcing your credit control.

12) Lighten the load
Release the cash you have tied up in
un-shifting stock, says Andrew Duncan, partner at consultancy Bridge Business Recovery. ‘I often go into companies and find they are carrying far too much stock. It’s important to look at your whole supply chain management. If you’re holding items in June that you’re not going to sell until Christmas, renegotiate with suppliers.’ Duncan adds that it’s crucial for managers to start making their firms as efficient as possible: ‘2010 is going to be a tough year. It’s time to cast a critical eye across your entire operations.’

13) R&D tax credits

If you have invested £10,000 or more in certain types of technology, you could be eligible for enhanced tax relief through research and development investment, or money back in tax credits.

14) Pastures new
Robert Forbes, owner of Plutus Wealth Management, opted to move into a serviced office as a way of saving cash and spreading his outgoings. ‘If we went down the leasing route then we would have had to pay around £40,000 in equipping the office and another £20,000 hiring a receptionist. This way we’ve saved tens of thousands of pounds. It has also meant that we don’t have big lumps of cash going out every quarter – which has been really useful.’

15) Centralise data

For Forbes, having a customer relationship management (CRM) system is crucial to driving more sales. ‘We spent £6,000 to £7,000 on it but it has more than made its money back. It’s meant that all our staff are working to their maximum capacity and aren’t wasting time doing unnecessary admin,’ he states.

16) Less is more
Staff may be more willing than you think to accept a cap on the hours they can work. ‘As the process of recruiting and training people can be very lengthy, we didn’t want to make redundancies and then have to re-hire once the upturn came,’ says Danny Cooper, manager of architectural practice RLT Built Environment. For Cooper, cutting the hours staff were allowed to work seemed the obvious option. ‘It gives us the flexibility of moving staff back up to full-time once things improve,’ he comments.

17) Separate bank accounts
Marcus Brennand, founder of multi-media company Digital Marmalade, learnt to manage outgoings after the dotcom bubble burst. ‘In the early days, our business got into trouble by having too much of a “spend-as-we-go” approach. Suddenly our cash flow dried up and we were faced with three successive months of bills to pay, which nearly made the company go under. Now we have a separate bank account just for bills so we won’t get bitten in that way again.’

18) Extend your terms
You could agree to pay a higher cost to a supplier for extended terms. This is obviously better for a cash flow blip rather than a long-term strategy, but it could work very well for getting you out of a hole.

19) Talk to HMRC
Don’t be in denial about your taxes. Launched last year, the government’s Time to Pay scheme allows companies experiencing temporary cash flow difficulties to defer their tax payments. Most businesses agree a repayment time of six months or less, but you may be able to negotiate a longer period. So far, 233,800 companies have used the scheme. While certainly useful as a tool to give your business breathing space, the danger is that another wave of companies will go under when this tax amnesty expires in 2010.

20) Go for the money
Working smart for your sales, instead of hard, is crucial for cash flow. Always focus on the most profitable customer, not the biggest, says Involved Investors’ Daniels. ‘You need to go where the big fish are and then redeploy staff accordingly.’

21) Review pay structures
Marion Tapp, director at Tristar Oilfield Services, says reducing salaries was the only option left to ease cash flow. ‘We don’t have any frills as we already run a very tight ship and there were no other things to cut. But we didn’t want to get rid of our guys because we really value them,’ she says. Instead, the directors had frank discussions with staff, making it clear that either some people would lose their jobs or everyone could take a 20 per cent wage reduction. ‘In the end, everybody, including the managing director, took a cut.’

22) Do it yourself

Emmy Scarterfield, owner of Emmy Shoes, says she had to cut costs when the price of imports increased. ‘We had planned to relaunch our website, but when we got the quote back it was too expensive. Instead, one of our team taught herself web design and we created our site for free. What we have is a perfectly good interim solution and the costs were minimal.’

23) Price review
Go back to your suppliers to ensure you are getting value for money. Plutus’s Forbes says, ‘We have quarterly reviews where we identify cost creeps. Not too long ago we managed to trim back stationery expenditure by about 15 per cent.’ Andy Berrow, regional manager of Business Link in London, agrees with implementing such a process: ‘We helped one company review its telephone supplier and saved it 9 per cent by getting quotes and shifting to another operator.’

24) Stocking fillers
If you’re running a business that requires high levels of stock but want access to the cash tied to it, asset-based lending might be worth a look. Whether you are eligible for it will depend on the nature of your stock. Normally companies can get around 50 per cent in advance of the sale of the stock.

25) Cut out the middle man
Jim Aird, owner of motorcycle clothing company Scott Leathers, decided to bypass his wholesaler in a bid to save cash. ‘We now look to buy direct from the supplier wherever we can. By doing so we can save up to 50 per cent,’ he says. Aird maintains that he can source overseas suppliers without incurring punitive costs. ‘Because the government is so keen to promote exporting at the moment, we were given a paid flight to Brazil. While looking to build trade links, we’ll also actively seek new suppliers.’

26) Take an oath

O-bit’s Breith now asks for personal guarantees from all the owner-managers he does business with. After implementing the policy last year, he says it’s worked well for guarding against bad debt.

27) Insure against bad debt
Trade credit insurance covers against the risk of non-payment due to your customers’ insolvency and protracted default, so can be invaluable in protecting your business. As many insurers have cut their policies severely due to an increase in company liquidations, the government recently extended its credit insurance scheme to enterprises that have seen their insurance pulled since October last year. Visit the Business Link website for more information.

28) Refinancing
Transferring your debt from overdrafts to long-term loan repayments used to be a way to secure better repayment terms, but in today’s market the chances of negotiating a more favourable deal are slim to none, says Martin Austin, director at accountancy firm Tenon. However, he adds that if you are in a cash hole then it is still possible to arrange a repayment “holiday”. ‘This is likely to cost you, but may be a good short-term option,’ he says. Although it seems banks are not currently in the business of helping companies restructure their finance (at least not in a way that is beneficial to the company), there are still some useful facilities available, such as letters of credit, that will provide you with cash cover for payments. However, the banks will ask for a cash value of the sum you require, which can be anything from 20 to 100 per cent depending on your trading and lending history.

Nick Britton

Nick Britton

Nick was the Managing Editor for when it was owned by Vitesse Media, before moving on to become Head of Investment Group and Editor at What Investment and thence to Head of Intermediary...

Related Topics

Cash Flow