Staying in the black is one of the keys to business success. Try these 7 tips to successfully manage your cash flow.

  • Knowing your customer   Check out the exact name and legal status of the business you are supplying. If it’s a sole trader (Private Business Corporation) or partnership, the proprietor or partners are personally liable so make sure you have their full details. This information can be obtained from the Registrar of Companies offices upon payment of a search fee. When you receive the file, the details of directors are contained in a form called CR 14 or PBC 2. It is important to verify the details of the directors that you see on this form from the ones that you will have been supplied by your client. Often times the residential addresses on this form might differ from the one that your client might supply you, so it is important that you ask for a copy of the proof of residence for the directors. Businesses can disappear much more quickly and easily than individuals. Don’t be afraid to push for all the information you need – if you can’t get it now, it will be far more difficult later. Watch out for ‘friendly’ references that the potential customer gives you. Referees that you choose are far more effective. Invest in credit reference information – it could save you a bad debt. Set some rules that you (and all your employees) always follow and don’t be tempted to break them, even if you’re put under pressure to supply urgently
  • Payment terms   Set out and agree payment terms in advance and in writing. If you have an accounting system make sure that these terms are set in the customer’s account. There are instances where you deal with large corporations, these usually detect payment terms to you (buyer power) and often times because you want to do business with them you tend to accept their terms of payment. If their payment terms are likely to cripple your business it will be better to delay doing business with them until such a time when you are ready to take their payment terms. Watch out for any wording in documents from your customer that changes the agreed payment terms. If you accept their order, you might also be accepting their changed payment terms. If their documents contain terms that are different to yours and you fail to challenge them, their terms will take precedence. Whenever you write about payment terms on your invoices, include the rate of interest you will charge for late payments. If you have not done so and in the event that you take legal action the prescribed rate of interest will apply e.g. in Zimbabwe it is 5% p.a. Even if you don’t intend to do so, it can be a useful deterrent against late payment. Raising a further invoice for interest and late payment charges is an excellent way of gaining your customer’s attention and raising the profile of your outstanding invoices. If your customer unilaterally tells you they are going to take longer to pay in future, you will have to decide how important their orders are to your business. If they are claiming the extended payment terms for invoices already raised, you should seek to understand the reason why the client has asked for extended terms and assess how this will impact on your cash flow
  • Invoicing   Get invoices right first time; raising credit notes and reissuing invoices takes up resources and time better spent elsewhere. It also changes the payment due date. Ask customers what they need on the invoice in order to approve it simply and quickly. Include at least the following:
  1. Your full name and address
  2. Your VAT registration number (if you have one)
  3. Invoice date, correct customer name
  4. Correct customer address
  5. Delivery address (if different)
  6. Delivery date and method
  7. Customer purchase order number
  8. A clear description of the goods or service supplied
  9. Accurate quantities, prices, discounts and total amount due
  10. Payment terms and due date
  11. How payment should be made with bank details (including sort-code and account number
  12. Invoice number or other reference to be quoted by payer
  13. Payment terms and due date and the reference to be quoted if payment is by direct credit.

It is better to send the invoice together with the goods to avoid instances where the invoice will be sent late resulting in your customer paying you late because of delayed invoices.

  • Treating suppliers fairly Make sure payments due are in your cash flow forecast so they don’t catch you by surprise. Talk to suppliers early if you have a problem preventing prompt payment. Paying promptly: earns your business respect may allow you to negotiate better deals or agree a prompt payment discount helps you avoid late payment or interest charges ensures supplies don’t get stopped improves your trading relationships makes you a more valued customer.
  • Factoring   Don’t wait until things become critical. You need time to put arrangements in place and it’s easier when you are not under too much pressure and it is also important to advise your customer that you want to do debt factoring and invoice discounting. Factoring – the factor agrees to pay an agreed percentage of approved debts as soon as they receive a copy of the invoice; 80–85% is common. The balance, less charges, is paid when the customer pays and the factor will undertake all credit management and collections activity following an agreed credit policy. The advance is likely to be ‘with recourse’ (meaning that the factor will be able to reclaim its money from you if your customer does not pay) so the option of bad debt protection should be strongly considered. Invoice discounting – immediate cash for up to 80–85% of the approved invoice value is available. However, responsibility for the sales ledger operation and credit management activity remains with the organization and the service is normally undisclosed to its customers. Payments received are paid into a bank account administered by the invoice discounter, after which the company is credited with the balance, less charges. Again, this advance is likely to be ‘with recourse’ (meaning that the discounter will be able to reclaim its money from you if the customer does not pay) so the option of bad debt protection should be strongly considered
  • Chasing payment   If is wise to call the customer before the payment due date to make sure that invoices have been received and there is no query; this is good customer service and it also ensures that your invoices are not missed by your client at the time of processing payments. Make immediate contact when payment has not arrived, be assertive about what you expect and when you expect it, and make the consequences of non-payment clear. Follow up promises to make sure they are met. If the customer claims to have paid ask for proof of payment and reference number in the event the payment was made by bank transfer. When you have an accounting system with a module called “Communications” make sure you log everything that the customer says concerning payment, this will make it easy for referencing and follow ups of payment even by another person in the organization who will have a brief history of the follow ups done so far. If a customer persistently pays you late or makes excuses, check them out and consider whether you are prepared to continue supplying on credit terms. It may be better to lose an order, or even the customer, than supply goods, not get paid and suffer a bad debt (when that happens you lose the goods and the money you are due). Be polite, professional and persistent. Do what you said you are going to do when you said you were going to do it. If the client is paying by cash, advise them the name of the person who will collect the cash. This will ensure that money is not collected by an unauthorized person
  • When cash runs short Plan your cash flow requirements carefully allowing for differences in the payment terms you receive from your suppliers and those you give to your customers. Regularly update cash flow forecasts to ensure you stay within your financing facilities. At this point it is also important to consider talking to your customers and offer them early settlement discounts. This might help to improve your cash flow at a time when .cash has run out. Monitor stringently against the plan so that you spot any variance as early as possible. If you think you might have a cash flow problem, talk to your bank or financier immediately. They might be able to help and the earlier you speak to them, the more options there will be. If you can’t pay a supplier on the due date, talk to them as soon as you know you cannot do so. Again, the earlier you talk to them, the more flexibility they will be able to show and the more likely they are to be able to accommodate an extension to payment arrangements. Remember, early communication is key – if you avoid talking to suppliers, your bank and other parties, you might find supplies or finance have been withdrawn or legal action has started and things will quickly escalate.

Innocent Machabe is a Registered Public Accountant R.PAcc. (Z), ACCA. He has a wealth of experience in working with businesses in manufacturing, retail and service industry. His work experience covers working capital management, business advisory, preparation of financial statements, internal audit, tax planning, training