Nowadays you will hear a lot of people comment “Cash is King” – well they’re right. Without sufficient cash to operate your business even the most profitable businesses fail. It’s important to remember that profits do not equate to cash in the bank….
Now for the good news. By implementing some simple cashflow strategies your business can very quickly improve it’s cashflow position.
Here are 5 of the most effective strategies that I’ve implemented with my clients:
1. Reduce your Stock
- Most companies hold too much stock just so they can meet to every customer’s demand.
- Age your stock on a regular basis and discount items that are slow moving. Unless absolutely necessary don’t re-order these unless you know of an incoming order.
- Meet with your suppliers to discuss improving delivery times and try match these as close as possible with incoming orders.
- What products do you carry most stock of ? What products contribute to the highest proportion of your stock?
- Focus on improving your stock procedures for these items first and you’ll be amazed at how quickly you can release some cash.
- Remember not all customers expect their orders to be issued straight away. If you have a lead time just make sure they’re aware of it – that way they can order in advance.
2. Improve Cash Collection Procedures
- Issue Sales Invoices straight away. If you wait until the end of the month and then offer 30 days credit your customers are effectively getting up to 60 days credit (and that’s assuming they’ve paid on time).
- Issue Customers with Monthly Statements. Invoices do go missing or are sitting on desks waiting for sign off. Statements also act as a further reminder for customers of their credit terms.
- Call customers in advance of invoice due dates for payment schedules. This is especially important if your customer is a large company ie insurance or multinational. These companies usually only run one or two payment runs a month and you want to make sure your invoice is approved and in that payment run.
- Improve your procedures for opening new accounts ie insist on credit checks & other supplier testimonials before you agree credit terms with them.
3. Check your VAT Status
- VAT is normally accounted for on a sales invoice basis ie payable to Revenue based on the total VAT on sales invoiced during the period regardless of whether you have been paid in that period.
- However some businesses can return their VAT based on the sales invoices paid to them in the relevant period. Meaning you don’t pay your Sales VAT until you’ve been paid. This has huge cashflow benefits if you offer generous credit terms to your customers.
- To avail of this your turnover for the year (exclusive of VAT) must not exceed €1,000,000. Businesses who supply unregistered persons and these account for at least 90% of their turnover can also avail of this ie hairdressers, hotels, retail outlets etc..
- If you are only registering for VAT you can simply select this option on your TR1 or TR2 form.
- If you’re already making VAT returns simply send an email to your local tax office with all your details, why you want to switch to cash receipts basis and from which period.
- If you’ve any questions please contact me or your tax advisor.
4. Use Supplier Credit Terms to the Full
- If you have 30 days credit then use them.
- Try match your supplier and customer credit terms as much as possible. If you have only 30 days with your supplier but you offer customers 90 days then you are putting a lot of strain on your cash flow. Talk with suppliers about extending credit terms – not all will but even if some do then it’s to your benefit.
- Try not to pay suppliers in advance – this is very relevant with service companies ie marketing & advertising, consultants etc.. If you have to pay in advance (ie dealing with one man operations) inform your client and get them to pay that element of the project in advance also. Otherwise you are in negative cashflow from the beginining !
5. Stage Payments
- This is particularly relevant for builders, architects, web designers, machine automators and designers, marketing companies etc..
- If your service / project is likely to span over a couple of months then issue a sales invoice at each stage. When taking on the contract discuss the stages involves, devise when each target is met and then issue a stage invoice straight away. Once you are upfront with your customers that this is your company policy they will more than likely accept it. Why not also ask for a percentage payment up front ? Once agreed make sure you build these terms into your engagement letter or your terms and conditions.
There are lots more ways to improve cashflow that I haven’t included and I’d love to hear what works for your business. Some of the tips above won’t be relevant for all businesses but if you decide to take some on board I’d love to hear how you get on.
Post by Sharon Kearns – www.sgkaccountancyservices.com