Cash In For Success - Lesson 1

So, cash is king. If you want good cashflow you speed up your receipts and slow down your payments. Simple! Well, perhaps simpler to say than to do. And the payments side of the equation is actually a lot easier to improve than the receipts, because you have control over payments. You have the money and you will decide when to pay it out and how much to pay. The receipts side of the equation is under someone else's control, namely your customers or clients. And just like you, they can decide when to pay and how much to pay. That makes it difficult for you trying to manage your cash.

In fact I would say that getting customers to pay reliably on time is one of the biggest headaches a small business will face, if not the biggest. But there are things that you can do to reduce the problem, even if you can't quite eradicate it. Let me encourage you. I have seen a small business, with less than £10m turnover, reduce its overdue customer invoices to a handful. It takes persistence and concentrated effort, tough credit control and good honest communication with customers. But it is possible to get good control of your customer receipts.

Over the next few editions of CF&M I am going to give several tips that will help you to do this. It's possible that you have heard these things before, but cashflow is so important that it bears repeating.

The things I'll cover will include:

• Credit checks
• Credit Limits
• Getting details right
• Invoice timing
• Credit control procedures
• Chasing invoices for payment
• Payment methods

But first I want to re-emphasise the importance of cashflow forecasts. Cashflow forecasts do not need to be complicated. But they are invaluable when you are trying to make sure you keep enough money in the bank. They give you confidence in the payments you are making, because you know how much cash will be left for the future. It gives you a chance of building up cash reserves to make an investment in new equipment or similar things. It shows you whether there is capacity to take money out of the business in dividends or bonuses. And it gives you early warnings of any problems that you may want to seek help with from your bank or investors.

One of the barriers that small business owners sometimes come up against in doing cashflow forecasts is that they don't know how to set one up on a spreadsheet. They don't have the confidence to do it. If they had a template they might be able to have a stab at doing it.

Well, if you subscribed to the Creative Finance & Management newsletter, you will have no excuse! You will have received from me a free cashflow forecast spreadsheet template.

If you haven't yet subscribed and you want the template, then go to the top of this page and in the sidebar there is form where you can input your name and email address. This will add you to the mailing list. You will receive an email to confirm you want to join the mailing list. After you have clicked on the "opt-in" link, you will receive an email with a link to a download page. On that page are the two free full-length articles I give to all new subscribers, and the cashflow forecast template will be on there too.

Got it? OK. I won't give you too many tips here for completing it. I think it's quite self-explanatory. Just fill in the yellow boxes. Why don't you spend an hour or two giving it a try to see how you get on?

Ok, my only three tips to get you started:

1. Start by going through the lines that don't relate to customer receipts or supplier payments (by supplier payments I mean payments of invoices that are on your AP/purchase ledger). Those are the hardest and you will get a lot of encouragement by getting the easier ones ticked off first.
2. When you forecast customer receipts you will need to have your up to date debtors list handy, and first go through it and make sure that you forecast the receipt of everything currently owed to you. Then forecast your sales (including VAT) and predict when those forecast sales will be paid for. Then add them to the receipts you have already forecast.
3. Use exact numbers wherever you can. But don't get hung up on getting it down to the last penny. You need to be able to update this every week in less than an hour. There's a balance to be struck. If you are estimating everything just to get it done, then you need to slow down and make sure you think about where you can possibly put in something more exact. If you are spending hours sifting through purchase ledger invoices to check payment terms and exact amounts, then you should probably step back and consider whether you will actually see the big picture any more clearly for all that hard work.

If you take this seriously I guarantee that two things will happen:

a) You will learn something about the financial dynamics of your business that will help you make decisions. You may even yourself adjusting some of your actions and decisions as you go through the exercise. And,

b) You will gain confidence in the payments you have to make and the actions you need to take to get customers to pay.

I'm interested to hear how you get on. Let me know at newsletter@charisfd.com.