Cash flow can be a tricky business for business owners – financial issues are to blame for 65% of business breakdowns in the first five years. But starting good habits early can make all the difference.

There is certainly a lot to learn but it goes without saying cash flow is vital to business success for all business owners. Let’s see if we can make it child’s play for business owners to follow these fundamentals

1. Invoice

Invoice. Invoice. Invoice!

It is obviously important to get paid on time but, for that to happen, you need to invoice promptly too. We see businesses all the time who delay or forget to send their invoices.

You need cash to keep your business running and poor cash flow can harm your progress even if you’re not owed a fortune.

Here are a few tips to help:

• Send your invoices! Sending your invoice is one of the most important parts of the cashflow process. Xero’s research indicates 30% of companies invoice within days but 22% take up to a month!!
• Clients can be slow paying, which is hard enough to manage but if the delays are at your end, you’re exacerbating the problem.
• Send invoices to the right person. So often, the person who pays the invoice isn’t the person who commissioned the work! Make sure you check this before sending the invoice – and definitely before the invoice is overdue.

17% of small business owners said cash flow was their most significant issue; invoice late and you are giving your client an interest free loan!

2. Keep Accurate Records

Unless you’re trying to go out of business it’s important to keep accurate and relevant records. Adding all of your purchase invoice to your accounting software will ensure you are aware of all payments that are due; with no surprise bills you haven’t budgeted for appearing out of the woodwork.

Separately, when it’s time to invoice, you might assume businesses have a comprehensive list of materials and services to hand. Well, according to Xero’s research, 27% of small business owners admit to not always keeping track of the time and materials spent on a client’s assignment – making it much more likely they will forget a costly expense or not charge for work / time spent.

Trouble spots to look out for:

• Do your staff understand the importance of billable time? Drill into them the importance of billable hours and having agreed this with the client before the work is done. You might emphasise that their salaries are directly related to the income they generate.
• Don’t charge for materials? You may still be incurring chargeable costs like software, mileage and other expenses. It all adds up.
• Not totalling costs until invoice time? That could hurt. If you haven’t watched agreed costs as you go, you might have drifted over budget and not be able to recover them. Even if you can, it doesn’t go down well. Keeping the right records in real time should help you deal with cost overruns.
• It happens all the time that clients ask for extras as the assignment continues and don’t expect to pay. It is important to watch all associated costs.

To stay compliant, you should keep perfect records; but having an organised and profitable business is an even better incentive

3. Define your Payment Terms

An average small business spends 1.5 days per month chasing payments! That is 1.5 days you could be doing billable work.

Look at it like this, you put “30 days” on every invoice so your clients have to stick to that, right? Well no, not really.

If your client’s default terms are 60 days or even 90, it’s easy for them to insist that those are their standard terms unless you’ve agreed otherwise. So, the first thing to do is to state your terms clearly and have these agreed before doing any work.

Here’s a checklist:

• Find out what the client’s standard payment terms are.
• Double check. If they say “30 days” that may mean “30 days after the end of the month after your invoice is in the system”, so an invoice sent on 14 February will be paid on 30 March. To some accounts departments, that’s 30 days!
• If your terms and the client’s terms don’t match, negotiate.
• Confirm any variation in writing and make sure the accounts department is aware of it.
• When you invoice, remind the accounts department of any variation in your terms.

4. Offer Easy Payment Methods

Make your invoice payment-friendly by including as many details as possible – sort code, account code, SWIFT, IBAN.

Look at collecting by direct debit using software like Gocardless! With Direct Debit you choose the dates you collect payments, meaning predictable cash flow for your business. Once a customer is set up to pay by Direct Debit, you can collect ad-hoc or recurring payments automatically on due dates.

Failing that, Xero allows you to have a “pay now” button so your client can click straight through and pay with a card using Stripe or Paypal.

Online accounting systems will:

• prompt you to set up an invoice template with all the information you need
• set up links with online payment processing systems like Stripe, which will also record the transaction and costs in the right place when the client pays.
• Even better you can collect by direct debit using Gocardless!
• calculate the VAT and other statutory costs when you fill in the details of your invoice

5. Reconcile Your Accounts

Online accounting software, with direct bank feeds, makes it simple to reconcile your accounts, generate reports and more.

By staying on top of your records you will be sure to identify any invoices that are not paid, quickly, and ensure you do not pay bills more than once!

Because your information is secure in the cloud, you can easily stay on top of your cash flow wherever you are.

Using your Accountants expertise, you can consider asking for them to produce monthly or quarterly cashflow projections for your business; ensuring you have as much information on hand as possible to allow you to plan appropriately

6. Cut costs

Always consider where you can keep costs down. Can you cut back on utilities, rent or payroll? Maybe you are spending money on services you are no longer using or insuring items that you no longer have. Can you renegotiate the terms of outstanding loans or leases?

7. Build a Relationship

To the people in the accounts department you may be little more than a than a number; another person chasing payment. So, what if you were seen as a person – and just as important, treat the accounts department as a person too….

Apparently a third of small business owners don’t always try to establish a rapport with the person who actually pays them: 19% try most of the time, 8% try sometimes, and 6% don’t bother. You can imagine who’s at the back of the queue when there’s a problem.

In Summary

As your business grows, it’s easy for the nuts and bolts of finance admin to come unscrewed, so keep these simple rules front of mind to keep the cash flowing.

And remember you are not alone. Your Magical Advisor and technology can help.

• Ensure the scope of work and payment terms are agreed in advance
• Send invoices quickly using Xero
• Automate invoice reminders so clients know when a deadline looms.
• Make collecting your money easy by using direct debit software like Gocardless
• Or integrate you Xero account with services like Stripe, so paying online only takes a single click
• Consider outsourcing your credit control to allow you to focus on generating more sales.
• Reconcile your bank / records regularly to give you an accurate view of your finances
• Keep costs down and review your purchases regularly
• Consider having cashflow projections prepared

And, because it’s Xero, using it with your accountant should be child’s play.