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What’s the best way to manage my growing customer base with cashflow?

I have just started my own company selling niche and bespoke kitchen products. My customer base is growing and I now deal with more and more suppliers. Whilst this is great, I am finding it very difficult to manage my cashflow as I have lots of outstanding invoices at any given time. What can I do to manage this without annoying customers over late payments?

Tracy Ewen writes: 

It is essential to plan everything. You must prepare cashflow projections for next year, next quarter and, if you’re on shaky ground, next week. An accurate cashflow projection can alert you to trouble well before it strikes.

The key to managing cash shortfalls is to become aware of the problem as early and as accurately as possible.  Financial services providers are wary of borrowers who have to have money today. They’d much prefer lending to you before you need it, preferably months before. When the reason you are caught short is that you failed to plan, a provider is not going to be as interested in helping you out.

Cashflow problems can often be self-inflicted. Companies which send out incorrect invoices often find that their customers end up returning an invoice and requesting a new one. Make sure all your invoices are correct before they’re sent out to ensure your customers have no excuse for not paying.

Make sure you have a strong process for chasing up your invoices. If your customer base is growing this is going to become absolutely vital.  Often businesses do not have a formal credit control function/credit controller to chase up overdue invoices and so the task is left to staff who probably do not have the time, experience or motivation to prioritise the job.

Balancing credit terms with cashflow needs is something many businesses struggle with. Be sure to tell your potential customers upfront about your credit terms – before you provide your product or service. To improve your cashflow position, you can be more stringent in your credit and terms, requiring more customers to pay cash for their purchases.

Try to look out for bad debt. Bad debt is defined as accounts receivable that will likely remain uncollectable and will be written off. Bad debts appear as an expense on the company’s income statement, thus reducing net income. It is almost impossible to avoid incurring any bad debt, but the more you can anticipate its likelihood and mitigate bad debt risks, the more profitable you will be. Be especially vigilant about having all your eggs in one basket – if a debt is growing to a size where it could seriously impact your cashflow, or if a major customer is consistently not paying on time, you need to address the issue urgently.

If you’re a new start-up you must try to get to know your customers. Some of your customers will pay on time every time – others will be perennial late payers. Speak to their finance teams regularly. Credit check them before you agree to provide them with credit. The more information you have about the customer, the easier your payment collection process will be.

Don’t always associate higher sales with better cashflow. If large portions of your sales are made on credit, when sales increase, your accounts receivable increase, not your cash. Meanwhile, inventory is depleted and must be replaced. Because receivables usually will not be collected until 30 days after sales, a substantial increase in sales can quickly deplete your cash reserves. 

Finally, you can consider using an invoice finance provider. These are commercial finance companies that can pay you today for invoices you may not otherwise be able to collect on for weeks or months. You’ll eliminate the hassle of collecting and be able to fund current operations without borrowing against assets such as your property.

Tracey Ewen is the managing director of invoice finance firm IGF

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