Cashflow management techniques
How to manage your cashflow to help speed up cash inflows and slow down cash outflows to improve overall cashflow.
Effective cashflow management is critical to business survival. It is therefore important to reduce the time gap between expenditure and receipt of income to ensure you always have the necessary cash to pay for your day-to-day business costs.
Customer management
Ensuring your customers pay you on time and in full is vital to maintaining healthy cashflow. To aid this, you should:
- Define a credit policy that clearly sets out your standard payment terms - see invoicing and payment terms.
- Issue invoices promptly, and chase outstanding payments regularly - see ensure customers pay you on time.
- Negotiate deposits or staged payments for large contracts.
- Use factoring - see factoring and invoice discounting.
- Maintain a good relationship with your customers so that you can see any signs that they are in trouble as early as possible - see identify potential cashflow problems.
Supplier management
You could ask your suppliers for extended credit terms. Giving your suppliers incentives such as large or regular orders may help, but make sure you have a market for the orders you're placing. Alternatively, you could consider reducing stock levels and using just-in-time systems - see innovation in manufacturing.
For more information, see stock control and inventory and developing supplier relationships.
Taxation
As a business, you may be liable for several taxes including Income Tax, Corporation Tax, VAT, business rates and stamp duty. It is important to keep good records to help you calculate your liability and complete your returns accurately. See set up a basic record-keeping system.
If you are registered for VAT, it makes sense to buy major items at the end rather than the start of a VAT period. This can often improve your cashflow, because you can offset the VAT on the purchase against the VAT you charge on sales. This may help you to manage a temporary cashflow gap.
You can also improve your cashflow by borrowing money, or investing more money into the business. This can help you cope with short-term cash problems or fund short-term growth, but it is important not to rely on these in your cash strategy.