It’s regularly referred to as the life blood of businesses big and small, but how much do we all really know about cash flow
Here are five of the biggest myths about the money that passes through UK businesses – and why you should change your way of thinking in order to maximise your success.
It’s all about profit
If positive cash flow is simply the difference between the money coming in and the money going out, then it’s just about profit – right?
Actually this isn’t quite true, as you could make the same profit over a 30-day period by getting paid for everything in the first week, or getting paid for everything in the last week, or any other pattern of payments in between.
Your monthly profit is only an aggregate figure – keeping positive cash flow throughout the month is about getting paid as soon as possible for everything you do.
Clients will pay when they want
This slightly fatalistic attitude is often expressed by organisations with no clear credit control procedures in place – the idea that, once an invoice is issued, it is simply a case of waiting for the client to decide to pay it.
In fact, you can incentivise early payment with small discounts, punish overdue payments with penalty fees and statutory interest, and issue polite but firm reminders between the issue date and the deadline for each invoice.
By doing this, you can encourage customers to pay in full, faster, or to take the offer of paying by instalments, and reduce the risk of non-payment while giving your cash flow a boost.
Big brands always pay slower
Another myth for the fatalists, this simply isn’t true – at least, not any more. While some big businesses will try to negotiate longer payment terms, many are increasingly looking to settle their debts more quickly, either to reduce their own liabilities or as a marketing gimmick, to show that they ‘support small businesses and independent suppliers’.
In any case, if the payment terms demanded by a large customer will put your cash flow under catastrophic pressure, it is not worth taking the order – smaller profits are preferable to being driven out of business, so stand firm in the face of any such negotiations.
Unpaid invoices are lost forever
Just because an invoice goes overdue, it doesn’t mean you should abandon all hope of ever recovering the funds, even over the course of several years.
A quick solution is to sell off the debt to an invoice finance firm, but this will usually mean losing a percentage of the full amount; in contrast, if you retain ‘ownership’ of the invoice but enlist a debt recovery agency to chase it, you could end up receiving more than the original amount thanks to the addition of penalties, fees and statutory interest.
Debtors won’t pay if you chase them
Finally, we have one of the ‘wrongest’ myths of them all – and while some debtors will react angrily to the threat of legal action or fees and interest added to their debt, in the end these types of threat are often what is needed to make people pay.
The truth is, debtors who haven’t paid by the deadline are much less likely to pay you if you don’t chase them. Besides, when you appoint a debt recovery agency to chase the debt, you avoid having to take any angry phone calls from the client anyway – leaving you to sit back in peace and wait for the boost to your cash flow once their unpaid invoice is settled in full.