Cash flow problems can shipwreck even the most promising of businesses: one minute you’re sailing along happily, the next you’ve hit the rocks and it’s all over.
Your business idea might be inspired, your enthusiasm unparalleled and your dedication to long hours admirable.
But despite this optimism and hard work, finding yourself in financial choppy waters is not uncommon.
Figures from the Department for Business, Energy and Industrial Strategy show that in 2017 there were 5.7 million private sector businesses in the UK, an increase of 197,000 year-on-year.
However, what these stats don’t and can’t show is how profitable – if at all - these millions of businesses are. Yes, they may be registered with HMRC but how many are thriving and not just surviving?
It’s estimated that around four in ten businesses fail after five years. And problems with cash flow is one of the major factors lurking beneath the waters, making them vulnerable to sinking without trace.
So why is cash flow so crucial and how can you keep it under control to steer your business to long-term success?
Here we explore the main causes of cash flow problems and how using methods such as Direct Debit can help to keep your company afloat.
Accurate bookkeeping should be central to your mission to avoid compromised cash flow. If you’re relying on antiquated manual systems, or just not giving the job enough of your attention, it’s time to get your books in order.
Accounts systems and software are constantly evolving and improving to make positive cash flow more achievable.
If you regularly lose track of customer payments, spot errors in your spreadsheets or are always playing accounts catch-up, switching to an automated system will help you keep on top of everything.
Offering Direct Debit as a payment option can help here. By partnering with a specialist bureau such as FastPay, you can combine your systems with their Bacs-approved software to streamline your collection process.
This software has many fully-customisable features, such as database management and mobile compatibility, which allow you to tailor it to best suit your business needs.
You can also integrate specialist APIs and platforms such as Xero and Sage for even greater efficiency and to fully embrace the business-boosting possibilities of the digital age.
As all payments flow seamlessly through the connected system, you’ll be spared the time-consuming and error-prone tasks of manual reconciliation and spreadsheet exporting.
Instead, you’ll receive regular reports about the comings and goings of your account, with issues highlighted quickly so that any anomalies can be resolved promptly.
By tackling one of the causes of these problems, the accuracy of your books will be transformed and your prospects of success boosted.
The Dreaded Debtors
For money to flow smoothly in and out of your business with barely a ripple, you need to keep a steady hand on your income and expenditure.
What you spend is easily controlled with good planning and management. When and how much your customers pay you can be more problematic.
The latest figures from Bacs, the company that runs Direct Debit, show that UK SMEs are facing a total bill of £2.16 billion to chase late payments.
The total debt stands at £14.2 billion and 39% of companies are spending up to four hours a week chasing these outstanding invoices. Out of the 1.7 million SMEs in the UK, almost 640,000 say they have to wait beyond agreed terms for payments.
If this scenario sounds familiar, you’ll understand how quickly it can impact on productivity and staff morale, as well as your bottom line. There could be a storm on the horizon.
Making your credit control system work as effectively as possible can significantly reduce the possibility of problems. You can take several steps to achieve this: make your payment terms crystal clear, invoice predictably and promptly, send polite automated reminders, carry out credit checks and maybe even have a good debt collection agency on speed-dial.
But if you’re using all these helpful but time-consuming tricks and are still having problems with cash flow, a different approach could help.
Swapping traditional payment methods for Direct Debit can help to banish late payment problems thanks to its flexibility and reliability.
Instead of relying on a mixture of different payment methods – Standing Orders, cheques, cash, credit cards – you can move all your customers onto a Direct Debit scheme.
Signing up to a Direct Debit bureau is a straightforward and cost-effective way of doing this. You’ll receive expert guidance and advice to get up and running quickly and efficiently.
Direct Debit bureaux can supply branded Bacs-approved web forms, phone scripts and paper mandates to gather all the information you need such as account details, payment amounts and collection dates.
The ball will then be in your court. You can set the amount, date and frequency of each collection so that you know exactly what to expect and when from individual customers.
Your bureau will also manage the submission of this data to Bacs on your behalf. Your customers’ accounts will then be debited and payments transferred into your business account.
Uncertainty is replaced by reassurance that payments will be predictably and securely made. Chasing tardy clients and anticipating cash flow problems will become a thing of the past as you enjoy predictable revenue and peace of mind.
Balancing the fluctuations of your business account is an ongoing task that may be easier at some times of the year than others.
If your business finds itself with large invoices to pay while still awaiting equally large customer payments, Direct Debit can ease the burden.
Its flexibility means you can easily spread the cost of your product or service via a monthly or quarterly billing cycle. Invoices that you may currently group together as one can be broken down into smaller chunks: more manageable for your clients and more predictable for you.
This straightforward reorganisation of regular payments allows you to picture your revenue stream for the weeks and months ahead. And as your Direct Debit bureau takes care of submissions and reports, it won’t create extra admin headaches for your team.
It has the added bonus of allowing you to improve your customer service and ultimately their loyalty. Many businesses consider its ability to create positive cash flow to be so beneficial that they offer a discount for those who opt to pay by monthly Direct Debit.
You can also offer customers the chance to clear arrears via small, regular payments to tackle your bad debtors list. This could lead to income that you may never have otherwise seen.
And when it comes to increasing your fees, any extra charges can be added to the monthly bill with less impact on client cash flow. You can boost your profits without having to send out a large bill.
Poor cash flow Forecasting
Creating an accurate cash flow forecast can be a challenge.
If you’re a new business, it’s often largely based on educated guesswork. If you’re more established, it can still be plagued with uncertainties.
Once you’ve analysed actual figures against forecasted figures, the main culprits behind any discrepancies can often be late payments and bad debt.
Direct Debit improves the chances of you making an accurate forecast: you’ll know when payments will be made and can factor in the likelihood of cancelled or bounced payments through analysing your automated reports.
Its adaptability will make it much easier to see which months you can expect to see a surplus and in which you can expect to see a deficit.
As you become used to the regular payments it facilitates, Direct Debit will establish itself as an important tool in predicting your future positive cash flow success.
Paltry profits are guaranteed to create problems with cash flow: too much going out and not enough coming in.
Your business might be able to sustain losses for a certain period of time if you have previous profits to draw from or have received a cash injection.
But there’ll soon be no hiding from the fact that you need to tackle your ongoing lack of profitability by discovering the cause.
Reasons can range from poor productivity, ineffective sales and marketing strategies, excessive overheads and haphazard stock management.
There are two more potential profit inhibitors – an inadequate system for collecting payments and unsatisfactory customer service – that can both be addressed with the help of Direct Debit.
If you think your business spends more time losing and chasing cash than collecting it, Direct Debit will solve the problem by revolutionising the way you receive payments.
With a scheme in place, there’s no need to spend hours chasing late settlements and wondering if – or when – the money will be in your bank.
You’ll no longer have to groan when you hear the well-worn line “The cheque’s in the post” or get a nasty surprise when an expected Standing Order suddenly fails to materialise. Instead, the whole process is simplified and streamlined to get the best results for you and your clients.
With bad debts reduced, profits will naturally increase and cash flow problems will be eased.
Direct Debit is also a winner when it comes to attracting and retaining customers. When they’re happy, they’re more likely to become advocates of your brand and spread the word that you’re a fantastic company to deal with. More customers can only have a positive effect on profitability.
But why does Direct Debit have such an impressive impact on customer loyalty and retention?
By offering them the most efficient and flexible payment method available, they see you as a helpful, hassle-free company that strives to make their lives easier.
All they need to do is fill out a Direct Debit Instruction, either online, over the phone or via a paper mandate, and their work is done.
Your new payment option will mean one less piece of financial admin for them to think about. Their monthly payment will be paid on time with minimum fuss: they trust that you will take the right amount from their account on the date they’ve agreed to and that you’ll inform them of any changes to their payment plan.
This puts them in full control of their own finances, eliminating a possible cause of cash flow problems, as well as benefitting yours.
The extra time created by this automation will leave you free to talk to them about more customer-friendly topics, rather than potentially awkward money matters.
Focusing positively on your client relationships in this way will add extra value to the services you already offer. And because payments are now automated, they’ll avoid any interruption to receiving your service, another customer-pleasing consequence.
Direct Debit collection doesn’t just reassure your customers that payments have been made successfully, it also offers unbeatable levels of security.
The Direct Debit Guarantee protects them with a comprehensive range of safeguards, unlike other forms of payment such as Standing Order which could expose your business to negative feedback. You can put their mind at rest that Direct Debit is the most secure form of payment available, making the chances of fraud highly unlikely.
All of these benefits add up to an unbeatable customer offering, one that your competitors could already be using.
If you’re not, you’re already one step behind and missing out one of the most popular payment methods in the UK.
Direct Debit now accounts for over four billion transactions a year. And, with over £1 trillion processed in 2016, its popularity and success continues to grow.
As an answer to banishing the unpredictability of stop-start payments and generating positive cash flow, its benefits are unrivalled.
So, will it be sink or swim for your business? Get any problems with cash flow under control with the help of Direct Debit and it will soon be smooth sailing.