CASH FLOW TIPS by Craig Alexander Rattray, a weekly series of guides for owner managers
Process invoices faster
Do everything every day. When invoices are received, they should be posted into the accounting system immediately and formally approved in some way depending upon the system you have in place. Ideally, the invoice should be matched to an already approved Purchase Order, but if not, there should be a procedure in place to ensure someone with the authority has approved an invoice before it is paid.
Have a system to collate spending commitments made and purchases invoices not yet received
As stated above, a Purchase Order system works best here. This is a system of advance approval for purchase commitments usually based on different levels of expenditure authority within the company. This allows greater control of purchases.
It also means that outstanding commitments can be considered when preparing cash flow forecasts. This is important as without it they can be missed and can have a large and detrimental impact on cash outflows depending on the nature of the business.
Follow a clearly defined payment policy
We suggest you make payment runs on set days. Perhaps monthly on the first day, or the first Friday of the month or something else that works for you from an administration and cash flow perspective. For some companies, a weekly payment run on a Friday may be appropriate.
This avoids situations where payments are being made daily taking up valuable administrative time and it also provides certainty from the suppliers’ perspective as you build up payment patterns – they know your timings so tend to chase payment less – this again saves valuable administration time. It can also buy you a little time as your response to being chased for payment is that it will be dealt with in the next payment run rather than immediately.
Review the outstanding trade payables/trade creditors schedule
This is a great review exercise as you and your management team will become familiar with the amounts due, the key suppliers and the overall balance. Most reports will also show expenditure by supplier for the year-to-date. This information at your fingertips can be used to negotiate with suppliers to agree discounts, better payment terms or even annual retrospective discounts.
The report will also highlight any suppliers you are not paying within agreed terms and allow you to discuss with them.
Understand your days purchases outstanding and the financial impact
This allows you to evaluate the number of days of purchases outstanding and provides an indication of how quickly you pay suppliers. If most of your credit terms are 30 days, the number should fall around this if you are paying on time.
A significant lag against credit terms can be indicative of either problems with cash and the inability to pay on time or lax administrative processes.
Cash Flow Tips appears here every Thursday
Extracted from Mastering Cash Flow For Business Owners by Craig Alexander Rattray and Jeff Borschowa, available on Amazon, priced £6.95
Craig writes a column for Daily Business on alternate Mondays