Optimise Accountants -

Managing Your Cash Flow Effectively

June 11, 2013

Posted by Simon Misiewicz on 5th June 2013

Managing your cash flow effectively

Are you living day to day with your money?

Would you like to look at your bank balance without worrying?

Cash flowing out of the business

Money that is flowing out of your business that needs to be paid to suppliers, employees, banks etc. Those that have been called upon by you to help with running some of the business activities.

If you value your suppliers and employees it is always best to remember when they are to be paid and make sure that they are paid on time.

If you want the quality of their goods and services to be high, then be sure that they are motivated by paying them when they are expecting to be paid. A good supplier relationship is critical to your business growth.

I worked with a financial services company and we were trying to reduce the overheads costs to become more efficient and profitable. One of the suppliers was our bank and they were charging approximately £600K per annum to use their services.

I asked them to come for a meeting and openly shared our costs and took them through how we used the bank. They were shocked that a company called them to discuss such matters, as usually they have to chase their clients to see if there is anything that they could help with.

They reviewed our business processes and identified another form of banking that we could use that saved £60K per annum.

This achieved 10% cost savings by simply asking a supplier to help.

Do not be afraid to ask your suppliers to help you with a particular problem.

I am sure if they feel that they are being treated fairly and that your business is growing, which means more business for them; they will jump at the chance to help. This will help you and the supplier to build your relationships even further.

I would always advise that you should not spend any money unless you have reviewed your cash flow forecast on that day.

If the amount of cash you are looking to spend is within the cash flow then you have verified that the activity was thought about and fully costed. If you find that the proposed expenditure is not on your cash flow then you can consider these two questions.

Why was the expense not known about at the point of producing the cash flow forecast? Will this activity incurring the expense generate additional revenues or decrease the forecasted profit?

Either way the cash flow will need to be updated and should also prompt you in the future to think about similar situations when producing the next cash flow forecast.

When I have asked businesses, large and small to incorporate this form of questioning each time they were planning a new task / activity that would require money being spent, over 20% of the time the activity was cancelled if they had not forecasted it and could not justify spending the additional money . Isn’t it worth taking the time to question what you do each day to ensure that it is aligned to your business goals?

People often ask “What does money flowing around the business mean”. If you ask many so called experts about cash flow they will talk about money owed from customers and money owed to suppliers.

Businesses owners and managers alike are stunned when I show them that the money flowing around their business in the forms of orders not yet worked on, delays in order fulfilment and stock more than doubles the money owed from customers and to suppliers.

Suppliers often call businesses to offer great discounts if they buy more than what they were originally ordering. This form of discount is what was called in the industrial age of business “economies of scale” the more you buy the less you pay.

That said I worked for many businesses that wrote off stock because the items sitting on the stock shelf became obsolete.

One example is when I worked in Italy and America for an aerospace defence company. They purchased parts for planes that airlines were asking to be built. Unfortunately they were being talked into buying more parts than they had a requirement for because of the large discount. Sometimes suppliers would offer 40% off their products if you bought twice the amount. This sounds very appealing to many managers. In this instance, the factory in Italy, ordered parts for planes that an airline had requested. These orders were cancelled and the parts became obsolete as did the design for the plan, which meant that there would never be a customer for these parts. $2m had been written off because of parts being ordered that would not be ever used. This more than outweighed any discounted benefit that the supplier gave for ordering more than the original quantity.

My advice to any company is to only order goods and services that they know for certain will be used within three months. Ignore the calls for discount from suppliers. If you have not given your suppliers any money for additional stock then that money sits very nicely in your bank account. The discounts that you were promised will have been lost if you are financing these purchases through bank overdrafts or other forms of financing, especially if some of the stock is at risk of becoming obsolete.

When a customer places an order with you, be it over the phone in person or on the internet you need to ensure that the order becomes visible so that you can plan in the time for it to be completed as quickly as possible, ensuring that the quality of work is of the highest order, an invoice is raised and sent to the customer.

When I have been asked to work with a client that is facing cash flow problems one of the first questions I ask is “When do you invoice your customers?” I am normally told “At the end of each month because our Finance team prefer it this way”. “I see” would be my reply “the same finance team suggesting that they have cash flow problems and you need to get some cash in from your customers?”

Imagine this with me. You have just finished several orders with one customer amounting to £15,000 on the 3rd June. You put this order in your new trays, but get stuck with other customers and starting their work, after all, the harder we work the more money we get paid, right? It is not until 28th June that you allow yourself the time to do some administration and notice that the £15,000 order can be invoiced but they have 30 days payment terms with the customer.

You put the invoice date as 28th June and put the payment date as 28th July. A few weeks goes by and on 15th July a supplier calls you to settle an outstanding invoice amounting to £5,000 that needs to be paid or they will stop an order you have placed for work that starts tomorrow.

You phone the bank only to be told that you are already in your overdraft and they are not willing to increase your overdraft limit, in fact they are demanding that you make some payments in the next few days or they will apply some additional bank charges. Now you are faced with suppliers stopping goods from being delivered, resulting in an unhappy customer and a bank that is also demanding money to be paid. Why did this all happen? The only reason this problem was caused is because the customer invoice for £15,000 was not raised until 28th June.

If the invoice had been raised when the work was completed on 3rd June the money would have been in the bank by 3rd July.This situation would never happen if the administration process of raising invoices had been streamlined.

Irrespective of if you have a finance team or if you do your own invoices, be sure to create an invoice and send it to your customer immediately upon work being completed. It will help you with cash flow and will ensure that the above issue does not happen to you.

If you have ever worked in Finance or run your own business you may have heard these comments from your customers when you are chasing them for money “I have not received the invoice”, “The cheque is in the post”, “there is a dispute with the invoice that needs sorting”. “We are paying your invoice next week as we only do a payment run once a month and we did not receive your invoice until 17th July even though you dated your invoice 28th June”. All of these comments will damage your cash flow and your relationships with your customers.

One of the most frustrating aspects of collecting money is when customers claim that they have not received your invoice, despite it sometimes being sent with the goods and services . To prevent this happening to you always send a physical invoice or better still send an email with the invoice. Why send an email rather than sending invoices by post?

There are two very good reasons.

Email systems have a received and read notification. Whenever you send an email you can prove that they have received it and have read it. The only time that this is not accurate is when you type the wrong email address but you should get an email notification saying that the email could not be sent to the recipient. After a few days of the invoice being sent call them and say “I am just checking that you have the invoice I sent dated XX/XX/XXXX and wanted to make sure that there are no queries with it”.

This does several things.

First of all, any claims of non-receipt are cleared up immediately. Any reasons for the invoice being in dispute are clearly known and can be resolved over the phone. Finally a lot of customer orders are placed because they are having a conversation with you. So, by calling them to check if the invoice has been received gives you an opportunity to sell more products and services.

How would that benefit your cash flow?

One of the benefits of sending invoices by email is the simple cost of printing out the invoice (ink), putting it into an envelope, putting a stamp on the envelope and posting the invoice. The cost of an envelope is circa 15p, a stamp is circa 60p. Each time that you send an invoice through the post you are paying 75p. An email will cost you nothing. All of the time of printing and stuffing invoices into envelopes equals money that you could be earning working on client orders.

If you have an agreement in place with a customer to ensure that the payment terms are specific. For example I would suggest that invoices are to be paid by 30 days of the invoice date and not 30 days of the invoice being received”. You may be faced with customers who say “we did not receive your invoice dated 28th June until 10th July therefore the payment date is 10th August but because we do not do a payment run until the end of the month we will not pay your invoice until 30th August.

The difference between the invoice being raised 28th June and 30th August is 63 days.

This is more than double your agreed terms. I would suggest that any time you are faced with this is to contact the person that signed the contract and remind them of their terms. This certainly should get a reaction for them to make payment.

For more information please contact us on 0115 946 1991 or Clik Here to email



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Telephone: 0115 939 4606
Email: simon@optimiseaccountants.co.uk