If you have an electrical, landscaping, construction, carpentry, plumbing or other trades business, we know that cashflow in your business can be a real headache.
Juggling and prioritising who to pay first because you don’t have the money in your business to pay everyone is just one of the challenges. As a trades business, we may have suppliers to pay, sub contractors to pay, CIS to pay to the HMRC and we may also have VAT obligations. If cashflow problems become more serious, you can kill your business if you get the point where you simply don’t have the money to fund doing the work in your business.
So here is a checklist of some of things that you could review in your business to make sure you are making your cashflow the best it can be.
✓Review your customers’ payment terms
Do you sub contract for other trades businesses, work with commercial clients or do you work in the domestic market? Each of these types of customers may have different payment terms.
You can usually expect your domestic customers to pay either up front or on the day.
If you sub contract for another trades business, you may get paid weekly or monthly for the work you have done that week. If you aren’t getting paid frequently enough, it’s worth asking if you can be paid more often – if you don’t ask you don’t get and their other sub contractors could be getting paid earlier than you just because they are asking.
If you have commercial clients, you may have terms set out in a contract with them and, depending on the organisation, those terms in worst case scenario could be anything between 30 and 90 days. It’s really important therefore to negotiate payment timescales right from the start and advantageously to yourself as possible.
It makes sense to continually review your payment terms and see if you can improve these. Think about how for future contracts or on renewing these contracts you could reduce the payment days for your invoices.
✓Review payment terms with your suppliers
How many days do you normally pay your suppliers within? If you are paying invoices as they come in or weekly then you are very likely to be paying money out of the business much more quickly than it is coming into you. Hence, one of the reasons your cashflow is suffering. Be disciplined and do suppliers payments just once a month where you can, or if the payment terms with some suppliers can be extended, then pay to these dates.
There will be exceptions to this of course. Sometimes you can pay early to get discounts on products you are buying and it’s worth doing. Sometimes you will have sub contractors working for you that need paying more frequently. All we are saying is, make your default position that you make payments just once per month and only pay others in between where it is absolutely necessary.
If you have regular supplies that you have a good relationship and trading history with, do try and negotiate to improve your payment terms with them.
✓Take payments up front
In your business you may often be incurring costs up front for supplies and materials and so you therefore need to charge your customers up front enough to cover these initial costs.
You may be working for a customer on a large project and it is often appropriate to take staged payments from a customer so that you are paid throughout the project and aren’t waiting to be paid right at the end. This is vital as you need to resource the costs of sub contractors, staff and materials and supplies during the project.
If you are already doing this already, review this – maybe you could be taking more up front payments or increasing the amount/s.
Just be clear with your customers up front and make sure that a written schedule of payments due is provided to them from the outset.
✓Make it easy for customers to pay you straightaway
You can do this by;
- Invoicing customers straightaway and don’t wait until the end of the month to do your invoicing. With the easy to use cloud based softwares, you can send invoices from a phone or tablet whilst you are out with a customer or in between your appointments
- Putting your bank details on your invoices so you can be paid by bank transfer (surprising how many businesses don’t) or a link to pay by debit or credit card
- Discouraging cheques as this leads to delays
- Taking card payments. For example, with a domestic customer, take payment from your customer before you leave their house and you won’t then need to chase them.
- For regular customers, make signing up to direct debit part of your terms and conditions. You won’t need to chase them and can simply collect the money on the due date.
✓Review your pricing
One of the reasons for your cashflow challenges is that your pricing isn’t quite right and you aren’t making enough profit on the work you are doing.
When was the last time you reviewed your pricing strategy for your business? If the answer is more than 12 months ago then it’s time to review. Reviewing your pricing can mean increasing some of the pricing but it doesn’t always mean this. It can mean packaging your services in different ways. You may wish to start to charge monthly retainers to help your cashflow or you could be introducing prices for new services.
✓Analyse what is tying up your cash and what you can do
Stand back from your business for a moment and consider where your cash is being tied up in your business.
Is it because your projects are taking a while to complete and you aren’t getting paid until it’s finished – if it is then what you can you do to shorten the length of your projects or to get paid earlier?
Is it because you have too many staff or sub contractors for the work you are doing? Is your workforce flexible so that you can stand them down when you don’t need them to save the cost?
Is it because you’ve overbought on supplies that you aren’t going to need to use in the short term? – if it is then what can you do to turn this into cash?
Have you run into a problem with a customer that needs resolution?
There are lots of reasons why the cash can get tied up and by focusing on the reasons then you may just be able to find a solution to free it up and to stop it happening again in future.
✓Regular and structured credit control process in place
Time spent on a weekly basis chasing unpaid invoices is a really good use of time. If you don’t have that time then it’s well worth getting someone to do this for you.
Remaining professional, friendly and consistent in your approach is your key to success.
If you have a bookkeeping software, this can be used to send email reminders and statements to your customers at the touch of a button. This, combined with putting in a polite and professional call to your customer to resolve any problems or issues, shows your customers you are organised and diligent and committed to collecting payment. Ask your customers for the date your invoice will be paid and let them know that you will give them a call again next week if it’s not been received.
You will reap the rewards and you will be able to see the amount of days your customers pay within reducing considerably.
✓Cashflow forecasting
This is where you are planning head for the money coming in and out of your business.
Are there seasonal variations in your business which mean that you are going to have less income in certain months? When is your CIS or VAT due to be paid? What staff/sub contractor costs do you need to factor in?
It’s about planning out the months ahead with what you expect to be receiving and then paying out so that you make sure you are going to have the funds.
This is something you can do yourself or you may want to get the help of your bookkeeper or accountant. It can be handwritten on a piece of a paper, on a simple spreadsheet or on more sophisticated software whichever suits you best.
When you do this planning, you will be able to see the months where your cashflow is going to be the most challenging so you can make plans to try and avoid this or to manage this.
And finally………….
We hope that you will have found something in this blog to help the cashflow in your business.
We work with lots of trades businesses supporting them with bookkeeping, credit control and cashflow forecasting and so if we can help in anyway, please contact us at The Bookkeeping Department on Tel: 01462 455455 or join our mailing list. We offer a free 1 hour consultation – available by appointment. Appointments for Saturday mornings or early evenings at our office are also available.