Maintaining a healthy cash flow is vital to the survival and prosperity of any business, but particularly for smaller firms who are often dependent on a few larger customers paying them on time.
According to the most recent figures compiled by the Office for National Statistics (ONS), less than half (45 per cent) of start-ups survive beyond five years. Businesses situated in London (10.6 per cent) and the North East of England (10.2 per cent) are more susceptible to the highest number of annual death rates.
Cash flow is the lifeblood of any business but can be very difficult to manage effectively without the right processes in place or turning to alternative sources for help. Steve Deutsch, Chief Executive of Wesleyan Bank, below outlines his top five tips to enable firms to stay on top of their finances.
Establish a clear credit control policy
It’s vital that businesses introduce consistency and clarity to their credit control procedures and communicate these to their staff and customers from the outset. Key considerations should focus on agreeing clear payment terms, how much credit can be extended to customers and implementing set dates when debtors are chased by telephone, email and in writing.
Leading credit control software can support businesses to accurately manage all debtor information within a single system, reducing the administrative burden and errors associated with paper-based processes or Excel spreadsheets.
Utilise modern technology
Cloud-based accounting and eInvoicing applications enable SMEs to take a pre-emptive approach to boosting cash flow and proactively address issues around late payments. eIinvoicing solutions save time by eliminating inefficient manual purchase-to-pay processes and provide an audit trail to show that invoices have reached their intended recipients on time and haven’t gone ‘missing’ in the post.
They also ensure that the invoice information is 100 per cent accurate, removing another reason for their customers to delay payment.
eInvoicing solutions offer mutual benefits for businesses, customers and suppliers. Administration costs are dramatically reduced and the cost of this technology can be covered by additional rebates organisations are able to negotiate through paying promptly.
Use finance to fund major investments
Businesses should consider using external finance providers when seeking funding for any major capital expenditure projects. Specialist lenders can secure competitive rates and manage each transaction meticulously from start to finish.
Companies can also opt to lease the assets rather than signing up to a straight hire purchase deal. Although there is a cost to the debt, it is tax deductable which can offer short and long-term cash flow benefits.
Leverage the Annual Investment Allowance (AIA)
The AIA, set to £200,000 from April 2016, allows businesses to write off the costs of certain assets against profits in the year of purchase. This helps to bring quicker tax relief against capital expenditure and preserve vital cash reserves. Most assets purchased for business use qualify, including: IT investments, office equipment and plant and machinery.
Firms should always plan ahead and set aside extra money when tax and VAT deadlines approach. But in the event of them being taken by surprise, organisations may wish to consider applying for short-term finance to cover the shortfall without putting a strain on their cash flow.
It’s important to remain open-minded and look for a provider who understands your challenges, is prepared to spend time talking to you, and doesn’t offer a one-size-fits-all approach. Talk to your business bank – but then compare what they can offer and what else is available.