Cashflow control or cashflow crisis!

Jeff Macklin extols the virtues of controlling cashflow even if the orders are flowing

Managing cash flow effectively is really a matter of life and death for a new business. Government figures show that small businesses are owed as much as £17bn from debtors at any one time and that 10,000 UK businesses fail each year because of late payment from customers. Ironically, one of the reasons for cash-flow problems is that small, growing businesses can find themselves ‘overtrading’ i.e. sales may be strong, but the company cannot buy more stock or pay its bills until invoices are paid. A previous client of mine was worth over £1 million yet was at the end of its bank overdraft limit simply because one customer was too large for its business.  It used all its working capital supplying this one customer! In addition, though the client was paying its own invoices immediately, it wasn’t being firm about collecting money from its own customers. To rectify the situation, the firm firstly had to walk away from its large customer and focus on smaller ones, and then actively chase late payments. Chasing invoices is perfectly acceptable, and in fact some businesses will never pay until chased! Finally, the company also negotiated better terms with its own suppliers. I recommend a number of important cash flow rules:

  • Make payment terms a central part of the contract and enforce them
  • Invoice as soon as possible
  • Chase invoices the moment they become due
  • Walk away from bad payers
  • Do a cash-flow forecast and re-forecast regularly – at least every month
  • Cash cheques as soon as you receive them

If you still have a cash flow problem, study your accounts and check where all the money is going. For example, owning your own assets (such as the office or equipment), is often not necessarily the best option. If a business owns all its assets, it has either spent its working capital or tied itself into a loan with interest payments. Renting is more expensive in the long term but it means a business can remain flexible. Broken equipment can be returned and serviced offices allow the company to be mobile. Where possible a business should also sub-contract rather than employ. Maybe you’re also paying maintenance or insurance fees. One client of mine did not even know that they had these contracts in place! The business was using different service providers on different sites, but renegotiating the contracts maximised its buying power and freed up cash. A business should always treat a contract renewal as a new contract and renegotiate aiming for a 15 per cent saving. I hope that none of this is new to you but as the figures show, UK companies are not managing their cashflow effectively. If you want to avoid adding to the statistics, keep a close eye on your cash flow as well as your profits. Jeff Macklin is a director of FDUK, which provides experienced part-time finance directors to ambitious fast-growing businesses. For more information, visit What do you think? Let us know in the box below.    


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