My small business runs out of cash because of late payments even though it’s doing well. How can I help manage cashflow?
At the end of the month I sometimes struggle to cover my overheads, in particular staff salaries, supplier invoices and office rent. It’s only because I have an overdraft facility that I’m managing. The irony is that my company is doing very well financially but because a number of our clients pay several weeks or more after their invoices are due, that can hit our cash flow. I’ve heard there are a number of cash flow solutions on the market these days but wouldn’t know where to start.
What are my options?
John Buchanan, performance senior manager at the chartered accountants HW Fisher & Company, replies: This is an extremely common problem for businesses, especially SMEs.
Even successful small companies often have periods where they struggle to meet monthly overheads. Yet without ready cash to make these vital payments, a small business – which is unlikely to have big cash reserves – may not survive.With both the national living wage and some business rates due to increase in April – both of which could put an extra strain on your business’ finances – it’s essential that you start to gauge the likely impact on your business now.It is crucial for your business to have the right finance in place. Inappropriate finance can be expensive and, if it’s not sufficient, prevent your business from growing.
Relying on an overdraft may not be the best option available. Overdrafts can be expensive and are usually repayable on demand, which means at any moment the bank could request payment of the overdraft in full. Banks are also reducing the number of overdrafts made available to businesses, so it is a good idea to look at other options now.
FIVE TIPS TO IMPROVE CASHFLOW
- Send invoices in a timely manner
- Make sure your debt collection procedures are robust
- Send reminders to clients before invoices are due
- Try not to hold excess stock – holding less stock could free up cash to spend elsewhere in the business
- Try to agree improved credit terms with your suppliers