Cash flow and how to deal with delayed payments

As the CEO or founder of your company you certainly have more important things to do than deal with the nitty gritty of financial forecasts like cash flow, right!? Well, this advice from Sandra Steinhauer, innovation adviser at Newable, might convince you of the opposite.

What is cash flow and why is it important?

Being aware of how much money is coming in and going out of your business within a certain period of time is essential for you. This way you will know if you will have enough money to pay your bills whether that's now, next month or the next quarter. Plus, it will allow you to make better plans for the future.

This is basically what cash flow is all about.

You might think that there is no need to track and analyse these cash movements if your business is regularly generating profit. However, even a profitable business might run into trouble if the flow of cash in isn't balanced by the flow of cash out of the business.

Of course, profit is important in the long run, but a company will more likely stop trading from a lack of cash than a lack of profit! Cash is the lifeblood of a business and it is key to survival. Thus, cashflow has to be every company's primary concern.

How to deal with delayed payments

Being fully aware of your current cash-position and future cash flow - ideally updated on a monthly basis - will also enable you to deal much better with delayed payments. Why is that?

Knowing your bottom line will enable you to better assess the impact of delayed payments on your business and choose between different options on how to deal with situations - like the current COVID-19 pandemic - where your clients might not be able to pay your bills on time:

1. Show understanding: Establish yourself as a trusted partner

Many companies are struggling in the current situation and might need time to adapt and emerge from the crisis and its consequences on their business. Showing that you understand their challenges and are open to work with them towards a solution can establish you as their trusted partner - something they are likely to remember beyond the present crisis.

If your company is struggling too, let your clients know. Maybe they can prioritise payments in your favour? Consistent and open communication with your business partners can be a powerful tool, especially in difficult times.

2. Be generous: Play the long game

Would you rather offer your products or services at a discounted price than not sell them at all? Then you might want to consider offering a 'COVID-19 rebate' to some of your clients to make sure they can still afford to work with you. Plus, there is a good chance you will retain them as long-term customers beyond the crisis.

Being aware of your company's cash position will allow you to make better judgements on how generous and forthcoming you can afford to be. You might well discover that your company can take a cut now to emerge with even stronger business relationships in the future.

3. Take action to recuperate your money

If your cash flow analysis tells you that your company urgently needs those cash streams coming in, consider measures to redeem your money quickly, like factoring. Of course, this comes at a cost, but having money in your hand right now might make this worthwhile to you. Thus, even though you will have to take a cut, you will control how deep this cut is going to be.

Depending on your relationship with a client you might even ponder taking legal measures like debt recovery. Always keep in mind though the tangible and intangible cost associated with such a step as well as your own time and effort spent versus potential gains.

Top tips on how to avoid delayed payments in the future

• Choose your customers wisely and consider which customers will be profitable to have for your business.

• Look at your payment terms and decide what works best for your business model.

• See if you can incentivise early payments, e.g. through offering discount for early payment. Your clients may welcome this and it will bring you cash sooner, whilst also potentially saving on future credit control costs.

• Make sure you send invoices to clients straight away after a business transaction; those invoices should contain all vital information - mistakes or missing information can cause delays in payment.

• Keep an eye on your outstanding payments and communicate openly and clearly with your clients if you suspect they might not be able to pay on time.

If your business needs advice and support, book a consultation by connecting with Sandra Steinhauer via her Enterprise Nation profile.