Tips for improving cash flow
You can offer the greatest service with the best team in the coolest office and still have your business fail if you’re unable to manage cash flow and manage it well. A huge number of businesses – large and small – fail every year due to poor cash management and poor cashflow. Whilst failure to manage cash speaks more broadly to issues of financial management as a whole, this article will be focusing on some simple strategies to improve cash-flow in particular.
1. Service agreement
Once you're ready to formally engage with a new client and you’re in the exciting honeymoon period of your professional relationship it’s important to introduce the business equivalent of the pre-nup – the services agreement (also known as an engagement letter).
This agreement should outline what services your business will provide, to whom they are being provided, the agreed fees, payment terms, etc. They set expectations right up front so there are no surprises from either side – nobody likes business surprises. Explain in your agreement when you expect to issue your invoices, whether that might be upfront, as progress invoices, or maybe upon completion. The agreement should also stipulate that you reserve the right to charge for work requested that is outside of the scope of the original price (e.g. you’ve quoted to build a website, not manage their social media accounts) and it should outline your expectation that if invoices are unpaid you won’t be undertaking any further work.
The agreement should be signed by both parties and filed away for safe-keeping before the job starts. There are templates for these agreements floating around the internet, but our advice would be to have your lawyer draft something simple for you to use as a template for all your ongoing work.
Send the invoice, get paid. Sounds simple enough, but surprisingly often people have trouble with cash-flow because they simply aren’t sending invoices for their work. My advice is to issue invoices regularly throughout the job and to stop work if invoices are unpaid and overdue. Here are some good pointers for issuing invoices:
Make sure the invoice is clear and easy to read and understand – from who, for what, how much?
Include as many payment options as possible so there are no excuses for non-payment.
Send the invoice to the right person – ask upfront who the invoices should be sent to.
Don’t send the invoices along with other work or else they might get lost – always send them separately and you can try sending them from a different email address (e.g. accounts@) to ensure they don’t get confused for anything else.
3. Clients who don’t pay
Unpaid invoices are the bane of any small business owner’s life and whilst it’s not possible to avoid them altogether, there are some strategies you can employ to minimise the risk of late payment or non-payment of your invoices.
Put yourself in your client’s shoes – did you make it clear about what the fees would be and when they would be payable? Have you given them sufficient reminders and notice to get the invoice paid? Are you offering a variety of payment methods? Have you delivered what you said you would deliver? Before setting the dogs on a client, check first to make sure the fault isn’t yours.
Reminders – remembering when to send invoice reminders can be time-consuming, boring, and dangerous for client relations as it’s easy to get wrong and receiving an undeserved overdue payment reminder can be upsetting for a client. Save yourself the hassle and set up an automated reminder service that plugs into your existing invoicing/accounting software. There are a few options out there that offer a low-cost, low-hassle solution to this task and are quite effective for sending out those initial reminders (e.g. 1 week over due, 2 weeks, etc.).
Getting heavy – once an invoice is past a certain point you’ll need to escalate the issue so the non-payer realises you’re serious about collecting the money and that you can’t be pushed to the bottom of the list. Once a certain number of reminders have been sent it is time to call the client directly to see what the problem is – remember to tread lightly as it may be you in the wrong. We suggest calling to see if you’ve done something wrong or if there is some other explanation for the unpaid invoice. If no amount of reminders or calls will get you paid it may be time to lodge a statement of claim with the local court or engage a debt collection company or a lawyer. Debt collection companies usually just take over the job of emailing/calling/mailing the debtor and typically only have more luck that the owner because the debtor realises the severity of the situation. Lawyers can be very effective, but very expensive, always take this path with caution!
Next time – if the recalcitrant client eventually pays up, you may want to discuss payment in advance for all future jobs to save any unnecessary unpleasantness in the future.
4. Cashflow planning
Last, but certainly not least, it’s important for all businesses to maintain a cash-flow forecast for their business for at least the next year. A forecast will allow you to spot possible cash shortfalls well in advance so that you can plan and act accordingly (e.g. by increasing your overdraft). On the plus side, they also allow you to see when you’ll have a surplus of cash so that you can invest money back into the business (or take a dividend!) and be safe in the knowledge that the business will be healthy after the money has been spent. For businesses in good financial health it's generally fine to prepare a cash flow forecast annually (with the monthly reporting being handled by a budget variance report) however if cash is an issue for your business we'd recommend running a live cash flow forecast that is updated regularly (possibly as often as weekly).
Cash flow management is hugely important for all businesses – large and small. If you feel your business could do with a tune-up when it comes to cash-flow, or financial management in general, please get in touch. We’ve worked with many businesses over the years (including our own!) to help improve cash flow and we’d love to discuss how we could help you and your business.