How to maximise your company's cash flow and save money

The cash you have in the bank decides the fate of your enterprise. It won't survive if you run out, generate a surplus and you can invest in growth.  
 
Planning properly, keeping on top of payments and knowing your numbers is crucial. We've looked at practical steps you can take to maximise your cash flow and ensure your business is on the best footing.

What is cash flow and why is it important?

Cash flow is the money going in and out of your business. It's calculated by taking your business bank balance adding the money you have coming in and subtracting what you're spending. It's normally reported on a monthly basis. 
 
Cash flow reports show the revenue you generate at the top, followed by operating expenses such as staff costs, rent, stock etc. The difference between these things is your operating surplus or deficit. The final section shows a summary with the opening balance of your business account, net cash movement and closing balance. 
 
Watch out for periods where the operating 'surplus' goes negative. The money you have in the bank might mean you can weather months where it's negative, but net cash movement needs to be positive in the long-term. 
 
Try to make sure you have enough cash to last three to six months if you don't bring in any new sales (this is sometimes referred to as 'runway'). This allows you to cope with any rough periods, such as having to wait an unexpectedly long time to get paid. 
 
Make sure your business can survive the risks you're taking. Hedge your bets and think about the cheapest way to test a new product or service. Try to save money on regular expenditure, such as applying to free accelerators rather than paying for an office.

Get better payment terms in place

Payment terms tell customers how quickly they have to pay. They are crucial to maintaining a healthy cash flow. Your business needs to be able to absorb the time between when you pay for the creation of a product or service and receive money for it. Shortening that period frees up funds to grow the business or just keep the lights on. 
 
Think about what payment terms are acceptable in your industry. Can you ask for money to be paid on receipt of an invoice? Can you ask customers to pay by direct debit?  
 
"It can feel a bit scary talking to clients about things like direct debit. But we find that most businesses are really receptive to it. It takes away that kind of worry and pain," said Jonathan Bareham, director of accounting firm Raeden. 
 
Referencing your payment terms helps remind customers and will hopefully encourage them to pay earlier:  
 
Remind the client of the terms when you're discussing costs and features of the service 
Include payment terms on proposals

Send a summary email outlining what you're going to deliver and include the payment terms 
Payment terms should appear on your invoice 
 
Make sure you have a reminder process in place, so you let customers know if an invoice is late and continue to chase them. 
 
Knowing how long it takes people to pay helps with cash flow planning. Try to base your expectations on historical data. Calculate the average time it takes across the whole business and look at it on a client-by-client basis when they are spending significant amounts of money. 
 
You can charge interest on late payments (the 'statutory interest' is 8% plus the Bank of England base rate for business to business transactions). To do this you need to send a new invoice adding interest to the money you're owed. Clearly, this is difficult from a relationship standpoint and will likely be last resort before taking legal action. 
 
It can feel daunting to ask for money up front but it's common practice and will make a big positive impact on your cash flow. For example, if you're developing a website for a client you could ask for 50% to be paid before you start the project and 50% on completion. 
 
Larger projects have a bigger impact on cash flow. Think about setting up a rule asking for part of the payment up front for anything over a certain value. 
 
Finally, get your invoices out as quickly as possible when the work's finished! Don't wait until you've set time aside to complete administrative tasks.

Understand the tax you have to pay

Large tax payments are critical for businesses. Because there's a delay between getting paid and when tax is due it can be tempting to use this money for other purposes. Try to stay disciplined and save the money you owe.  
 
Estimate the VAT you're going to pay in your cash flow forecast. Corporation tax is based on profits. If you earn less than £1.5 million you must pay Corporation Tax 9 months and 1 day after the end of your accounting period. It's helpful to put that money aside when you know how much it's going to be. 
 
It's worth speaking to HMRC if you are worried about being able to pay the tax you owe. You may be able to set up a plan to pay in instalments.

Break glass in case of emergencies

Cash flow planning will help avoid issues. But speak to your advisor or mentor and accountant as soon as possible if you think you're going to run into problems. 
 
Cash flow is normally forecast on a month-by-month basis. When things get really tough you may be weeks or days from running out of money.  
 
Write down every big payment you have going out with the date it needs to be paid. What can you delay paying? Phone people and ask for a reasonable extension. Are there any you can cancel? This could be anything from subscriptions to a freelancer you were going to use or reducing your own wages.  
 
Next look at the payments that are due. Clearly, you need to be chasing late payments. It's worth looking at payments that are not yet due, too. It's okay to put in a polite phone call to a company's finance department and ask if they've been scheduled. Companies often work on payment runs and may already know what date you're going to be paid. Defer loan payments if you have to. Banks can be accommodating but don't leave it too late to approach them.

Make sure you have different types of revenue

Some businesses are naturally seasonal. A wedding photographer is likely to receive the majority of their revenue in the summer. Think about what your business could offer during quiet periods. For example, the photographer could start shooting birthdays or bar mitzvahs.  
 
Bad debts are a common cause of business failure. An important client failing to pay can cause companies to go into administration because they don't have enough money left to pay their bills. Making sure you don't rely too heavily on a small number of clients helps reduce this risk. Having one or two customers that want to pay you lots of money is amazing but it's important to maintain your sales efforts and aim to diversify this revenue.

Think about dropping clients that are bad payers, particularly if you're at the capacity of what you can deliver.

Watch this video with Enterprise Nation member Jonathan Bareham sharing more tips on managing your business' cash flow.

How to track business cash flow

Take time to learn the financial intricacies of your business and establish a routine for looking at the books. You should be going through it at least once a week - it's a central part of your role as a business owner. Book time in your diary to look through payments in and out of the business, your cash flow and profit and loss, and expenses.  
 
Looking at this information regularly will help you spot ways to reduce spending. For example, you may notice the company's spending lots of money on train fares and encourage people to use Skype or book in advance. 
 
Online accounting software can generate these reports for you. Bareham is a big advocate of using cloud accounting tools like Xero. 
 
"Online tools can save hours, days, even weeks over the course of a year. It's vital as a business owner to get that time back. Even though the cost fo the apps might feel like something you don't want to pay for at the start, the time saving's far greater if you think about your hourly charge out rate," he said.

Bareham added that the real-time data these tools provide allows business owners to respond to opportunities quickly.

Think about other key metrics that dictate how much money you make. Online businesses could monitor average basket size and website conversion rates, for example. Investigate further if one begins to fluctuate. 
 
Can you answer the following questions?

• What's the average time it takes for customers to pay you?

• What's the balance of your business account?

• How long can the business operate before it runs out of money?

• What spending can you cut if you get into trouble?

Improving your cash flow will make sure your business survives. It also provides the room for expansion. Cash enables you to do things like hiring new staff and move to a bigger office. The small things add up, too. Keeping track of the money you're owed and reducing expenses help provide the space you need to grow.