How to maintain relationships for better cash inflow management
Craig Alexander Rattray is a Growth Strategist and Cash Flow Expert based in Glasgow, Scotland. He is the author of Mastering Cash Flow for Business Owners.
As highlighted in “The tips you need to manage cash outflow in the right way”, cash outflows are under our control as we decide when we make the payments from our bank account, and how much we pay.
But that’s not the case with cash inflows.
The uncertainty of cash inflow
The timing and quantum of receipts from customers are at their discretion, just like our cash outflows are, and that means they’re more difficult to predict with the certainty of our outflows.
This clearly makes cash inflows more difficult to manage and control. Credit terms and cash collection processes are a key part of good cash management.
The key in cash outflows is information, real-time data and ensuring we know what we owe, why we owe it and when it’s due.
Whilst we need that information too for cash inflows, it can be a bit more complicated.
Building the right relationships
There are many things we can do that will assist in improving the timing of cash receipts (more on this later). However, the personal relationship with a customer can have much more of an impact.
As the Finance Director (FD) or Chief Financial Officer (CFO) in difficult cash situations, my focus is always on paying the key suppliers first that are critical to continue trading and delivering our products and services. And similarly, those that are inclined to chase for payment are generally higher up on the payment list too.
It’s equally important to ensure that the operational team stays close to their day-to-day supplier contacts and highlights any cash and payment challenges that may spring up. That provision of knowledge, care, and making them aware of the situation, helps when there are issues with retaining supply.
If we approach that from the cash inflow perspective, we can use that insight to our benefit and adapt our approach accordingly.
Established and well-developed relationships make customers think twice before making late payments.
If they only have limited funds left to pay suppliers and it’s between your business and another where there is no relationship, in most cases you’ll be paid.
Steps to take to improve business relationships
There’s a lot more that I could expand on here, but it’s important to highlight some other key tips to improve cash inflows;
Speed up your invoice processing
Invoice when the work is done, services are provided, or products delivered. Ideally daily.
This includes good administration. Ensure all invoices have the correct details, like company name, address, the receiver, what work or service was provided, to avoid unnecessary delays.
My preference is for invoices to be sent electronically.
Provide clear credit terms, due dates and credit control policy
Credit terms and due dates should always be confirmed in writing and included on all invoices.
Ideally use a standard credit application form, with detailed trading terms, and credit check the potential customer too. Perhaps ask why they left their previous supplier and even make a call if there are concerns.
It’s also important to follow a clearly defined credit control policy. What is your debt collection process – dates, timings, actions? Are the finance and operational teams aware of the contents of the policy? What are the escalation procedures for overdues or over credit limit?
It’s good practice to put all of this in place.
Review outstanding trade receivables and trade debtors schedules
Both should be reviewed weekly and if you have a dedicated person, they should be chasing and reminding customers daily.
Typically, the aged debtors schedule is analysed in columns showing current, 30 days, 60 days, 90 days, 120 days and 120+ days. I aim to ensure there are no outstanding items in the end four columns, unless there are specific reasons for your company to offer extended credit terms.
There should be detailed actions for all individual invoices outwith the first two columns.
Make it easy to be paid
Online and electronic payments should be the standard method of receipt.
There are other things that can be done to improve timings of receipts like direct debit/automatic payments, taking deposits, incentivising early payment and various others.
Credit control and trade debtor/receivables management should be a regular routine for all businesses.
Remember, in my view, a sale is not a sale until the cash is in your bank account — focus on that and you’ll definitely improve your cash inflows.
You might enjoy...
Meet the team focusing on launching our new Sales development function – and tasting all the pastel de natas in Lisbon.
The transition from start-up to scale-up is a journey full of obstacles and opportunities.
All of us here at Pleo are deeply shocked and saddened by the War in Ukraine. Here's what we're doing to help.