Managing cash flows

Tips for managing cash flow

Neil Sevitt, partner and Head of Middle Market Services at Baker Tilly, offers his top tips on managing cash flow.

1. Businesses cannot operate without their ‘lifeblood’

Know at all times your exact cash/bank position. If you don’t know what you have available in the business, it’s difficult to make fully informed decisions, including those difficult decisions that you might have to make when paying partner/member drawings if your practice is a traditional partnership or LLP.

2. The importance of liquidity cannot be underestimated

Ensure that your management information is strong and that the finance function can always provide the business owners with an accurate position at any moment.

“A bad paying customer is not usually worth having. Credit check new clients before they are engaged, however well recommended they are or credible they may appear.”

3. Always know who owes you and be firm in your trade terms

Businesses must be able to collect cash from customers within the terms they set and collect this proactively.

4. Deal with queries from customers promptly

They won’t usually pay anything if there are any matters to be resolved on an invoice, no matter how trivial it may seem.

5. Don’t be tempted to trade with businesses who repeatedly fail to meet their payment commitments

A bad paying customer is not usually worth having. Credit check new clients before they are engaged, however well recommended they are or credible they may appear.

6. Schedule payments to suppliers carefully and have a regular monthly payment run

Don’t pay suppliers in an adhoc manner. This means the business' outgoings can be controlled and planned.

7. Stage monthly salary payments at a different date to supplier payment runs

Stagger payments for internal staff and external suppliers over the course of the month.

8. Look for ways of managing your VAT liability

This is particularly important if you undertake regular services for your clients, or you undertake project work over a period of time. Also consider whether your VAT return stagger optimises the cash position for the business to reflect any specific peaks and troughs, or seasonal trading variations.

9. Keep your bank informed of any unexpected changes in cash flow expectations 

Banks don’t like surprises and will usually be supportive if they know what to expect and why.

10. Do not use overdraft funding for longer-term projects

These include capital equipment purchases, or any other changes that may enhance business. Use longer-term funding, or check whether any grant funding is available to the business.

11. The level of ‘lock-up’ will determine what working capital will be available to run your business

Minimising debtor and work-in progress days will keep the cash flowing. The sooner that WIP is invoiced, the sooner that cash can be collected from the debtor ledger.

12. Some practices only allow full drawings to be paid if certain KPIs are hit

Consider introducing systems to ensure that drawings can only be paid if those KPI’s are met.