24 November 2017

Managing cash flow: a vital financial control

Growing a successful business requires sound financial controls – and controls around cash flow are particularly important.

Controlling cash flow is essential for any business. Your profits have little meaning unless you turn them into cash to keep your business thriving. In follow-up to our previous article, here are five top tips to help your organisation build a healthy future.

1. Reconcile your business bank balance at least monthly

This may sound obvious, but it’s important. Make sure the cash balance in your accounts system is reconciled to the bank statement and that somebody checks the reconciliation. This is the first control any business should put in place. Not only does it ensure you know how much cash you really have, it also protects your business against the simplest frauds that can occur. If somebody is taking money out of your company bank account, performing a bank reconciliation gives you a good chance of picking it up.

2. Bill your clients as early as possible – and follow up immediately

Don’t wait for month end to bill your clients - issue your invoices as quickly as possible. Once you’ve issued your invoices, call your clients to confirm receipt and ask them when they expect to pay. By being proactive, you can remove some of the common excuses clients use to delay payment, such as ‘I don’t think we received the invoice, could you send it again?’. Such tactics can delay cash coming through for several months, so don’t give your clients the chance to use them.

3. Chase up overdue payments

If clients don’t pay their invoices on time, chase them up. Establish a clear policy within the business, identifying who is responsible for making these phone calls. Depending on your business and how you manage your customer relationships, this might be members of your sales team or someone in accounts. Whoever it is, their responsibility should be made clear. Enforcing the policy is also vital – convey your expectations clearly. 

4. Consider early settlement or direct debit incentives

You might wish to incentivise customers to pay their bills on time or early by offering discounts for prompt payment. If you issue regular monthly invoices to the same clients, encourage them to set up direct debits. Any discounts you offer can be factored into the pricing decision, while the certainty of incoming cash flow should not be undervalued.

5. Establish a policy and systems for approving purchases

Monitoring expenses is a good detective control to help you spot if you are overspending, but you can also try to prevent the problem by establishing a hierarchy of purchase approvals. Your policy should make clear that no purchases should be made without proper approval. Identify certain individuals in the business who can approve expenditure up to a predetermined price point. Expenditure above that level should have to be approved by a director. In this way you can prevent your business from incurring unnecessary cost.

Although these controls are simple, they are also powerful. Businesses that implement and maintain them are well on the way to ensuring they have the cash they need to keep on developing and expanding.

To find out more about the issues raised in this blog, please contact Gareth Magee

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