During the Covid-19 pandemic, easily accessible funding was available to businesses in the form of bounce back loans and coronavirus business interruption loans.
Now that businesses are having to repay these loans, and inflationary pressures are resulting in increased costs, maximising cash flow is more important than ever.
How can you improve cash flow?
Here are some tips on how to manage your business’ cash flow:
Understand when your customers will pay you
It is vital that you set out your payment terms to customers at the order and invoice stage. Make sure payment terms are prominently displayed on your company quotes and invoices so there can be no ambiguity. Default due dates can be set up on Xero invoices, as well as payment terms, for example detailing the bank details to pay into for a customer’s ease of reference.
Ensure invoices are issued as soon as the work is completed. Issuing invoices at the end of a week or month is gifting additional days credit to the customer beyond the agreed terms. For regular work, repeating invoices can be set up to send automatically in Xero.
Avoid common errors which prolong the time it takes to receive payment, by ensuring invoices are invoiced to the correct email address, and have the correct information included, for example a customer may require an order number to be referenced to pay the invoice against.
Consider whether deposits or stage payments could be requested to help cover up-front costs. Ensure these payments are specified on your quotes and agreed by the customer.
Be aware of the prompt payment code. Effective from 1 July 2021, companies that have signed up to the Prompt Payment Code are obliged to pay small businesses (those with less than 50 employees) within 30 days. You can check if your customer has signed up at the following link https://www.smallbusinesscommissioner.gov.uk/ppc/signatories
Make sure you know if they have paid you
Regularly reconciling your bank account and therefore updating payments to your customer contacts in Xero is key to monitoring any late payments.
Chase invoices immediately. Invoice reminders can be set up in Xero to send customers an email when an invoice payment is either due or overdue. It is important that your bank is regularly reconciled in order to avoid sending reminders out to customers who have already paid, as this may damage the client-supplier relationship.
Leverage supplier payment terms
In the same way that you have agreed payment terms with your customers, you will also have set terms with your suppliers. There is no need to pay an invoice immediately on receipt if your supplier has standard credit terms of 30 days.
Small businesses or new start-ups are often given short credit terms at the start of the business relationship. Now that you have proven your ability to pay, look to renegotiate terms with long standing suppliers.
Identify lock up working capital
It is important to regularly review your stockholding to ensure you know what is in stock to avoid unnecessary purchases, and to regularly re-evaluate how much stock of each item should be held at any time based on your sales.
Bulk orders may be cheaper, but if you aren’t confident you’ll sell the full amount, you will be left with cash tied up in surplus stock.
A good inventory management system can be invaluable for tracking and reporting on sales in order to avoid overstocking.
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