How to manage your cashflow

Checklist

  1. 1 Regularly monitor and revise your cashflow budget to anticipate potential cash shortages.
  2. 2 Invoice promptly and chase outstanding payments vigorously. Invoices for business-to-business transactions must be paid within 60 days, unless an alternative payment period has been agreed. Public-sector bodies must pay invoices within 30 days.
  3. 3 Consider charging interest on late payments and debt recovery compensation charges to deter late payment.
  4. 4 Develop warning systems to identify where delays or unexpected changes could cause the business to run out of cash.
  5. 5 Be prepared to trade off profitability and other business objectives when your cashflow position is, or may become, critical.
  6. 6 Minimise the amount of cash owed to you by restricting credit periods or factoring debts. Generate short-term sales income by offering incentives to bring forward purchases and discounts for cash payment.
  7. 7 Cut unnecessary costs and shop around for competitive prices; negotiate generous payment periods and short delivery lead-times.
  8. 8 Use your stock control system to minimise cash tied up in stock.
  9. 9 Assess your cashflow position before committing to any new expenditure or increases in overheads. Consider using leasing to finance assets.
  10. 10 Be prepared to turn down orders if you cannot finance them. Negotiate deposits or stage payments for large orders and long-term contracts.
  11. 11 Build relationships with financiers and suppliers so they will extend extra credit when you need it.
  12. 12 Arrange additional financing before you need it. Seek equity investment if cashflow will not safely cover interest payments.
  13. 13 Sell unproductive or superfluous assets and discontinue business lines with negative cashflow.
  14. 14 Take into account short-term fluctuations which do not show up on monthly or weekly budgets.

Cardinal rules

Do:

  • focus on receiving payment for sales
  • keep cashflow budgets up to date
  • avoid unnecessary or excessive expenditure
  • arrange appropriate financing before you need it

Don't:

  • assume payments will be received on time
  • tie up excessive cash in working capital
  • overtrade by accepting orders you cannot finance