12/12/2014

By David Banfield, President, Interface Financial Group

A lot has changed in the past six years: Banking regulation has increased dramatically making it harder to secure loans and overdrafts, debtors have extended their terms of payment, often up to 60 or even 90 days, while production costs are once again on the rise. Another change has been the state of the economy. We’ve entered an era of recovery, where the businesses that managed to tough it out during the downturn are now positioned to grab a greater share of the market. Indeed, growth for the year ahead is estimated to be a promising 2.5%, according to the British Chamber of Commerce.

One thing that has remained constant throughout this entire period though is the power of money. The age old expression ‘Cash is King’ holds as true today as it did during the recession. The only difference today is what it is needed for and access to it. In today’s climate many SMEs are looking for capital to facilitate their growth, meet large client orders and invest in recruiting new and specialist staff. However, as every business owner knows, you can’t do anything without cash, at least not for very long.

The big challenge facing such businesses today is securing the money they need to grow. While in the past the big banks were the obvious option, this is no longer the case, as business lending continues to contract. A recent Bank of England report reveals that net lending to SMEs through the Government’s Funding for Lending scheme was down in the second quarter of this year by a staggering £400m.

The good news is that beyond the banks there is a host of financing options available to small and medium enterprises, from invoice financing to crowd funding, and you’ll be glad to know that new legislation requires the banks to offer alternative financing solutions should they decline a business loan application.

Before any of that though, you should look at your business’s cash flow, ensuring it is healthy and up to date. Much like the banks, any financier or investor will want to see your accounts as part of their due diligence. In the case of invoice discounting, at The Interface Financial Group, where we are purchasing invoices from you, we would expect our clients to have a healthy debtor base and this is usually evident from their cash flow plan.

In its simplest sense your company’s cash flow is the total unpaid purchases versus total sales due at the end of each month. If the total unpaid purchases are less than the total sales due, you are in positive cash flow, which is good. Below are three simple steps to improving your cash flow, freeing capital and making you an attractive candidate for financiers and investors alike:

Forecast and Analyse

First thing’s first, you need to understand the current status of your cash flow and where it is likely to go in the future. This means factoring and the various costs your business is likely to face in the coming year. If you’re on a growth spurt this could mean new machinery, more staff, or increased inventory to meet an order. Knowing when these expenses will be due and how the money will come back is imperative for the survival and success of any business.

Equally, it’s no use drafting a forecast and filing it away never to see the light of day again. You should plan things week by week and analyse the forecast regularly. Not only will this help you stay on top of the financials, but it will also show you where and when to expect spikes in expenses so you can better prepare yourself.

Segment, Segment, Segment

To make the development of your cash flow plan simpler it’s a good idea to segment your suppliers, customers and inventory. Once you’ve segmented them, it’s time to break them down even further.

So in terms of your suppliers it may be beneficial to split them into regular and one-off purchases. Seeing who you buy from most frequently, and how much you spend with them, may reveal opportunities to negotiate better prices.

Regarding your customers you should do the same. Separate them in terms of payment punctuality – prompt payers, the payers within the terms, and the downright terrible ones. Often just because a customer generates a lot of revenue for your business, it doesn’t mean they are overly profitable, especially if they pay late every month and you incur penalties on debts you couldn’t clear as a result. If you decide to use invoice discounting as a means of financing your company, this is especially important as you will want to sell the invoices with the shortest remaining grace period and be certain of them being paid on time.

Evaluate and Enforce Your Terms

The ideal goal here is to shorten the grace period offered to your customers while extending that which you receive from your suppliers. The greater a balance you can strike between the two, the more sustainable your business. Attempting to change your terms from 30 days to one week could damage client relations and result in them using an alternative vendor, so approach it carefully. You may also be able to offer incentives for prompt payment. Depending on your relationship with regular suppliers, you may be able to extend the terms of payment.

Whatever terms you establish, make sure they are enforced. Assess your collections process – are invoices sent on time, are clients reminded when payments are due, what is the policy and procedure on overdue invoices.