Duedil Blog

Every business owner’s worst nightmare is having a cash shortfall. It can lead to all sorts of problems: not enough money to cover wages for your employees, fulfill invoices for your suppliers, or pay overheads like rent and fuel. Luckily, we’re here to explain a few things you can do to avoid this situation, and what you can do when this does occur.

The main way to avoid a shortfall is to keep accurate forecasts, and feed this information into your planning process. In our blog post on managing payment terms and cashflow, we explained the need for forecasts that are as comprehensive as possible. As time goes on, how does your forecast compare to the actual cash flow? Make sure you regularly check these two figures, and investigate any discrepancies immediately.

In good company

It’s important to make sure that your customers are going to reliably pay on time. Even if you have experience dealing with a particular customer before, it’s always a good idea to run credit check on any customer. If they have a history of making late payments, definitely treat this as a major caveat emptor.

This sounds obvious, but a basic principle of business is the delivery of goods for a payment. You may have properly invoiced your customer, but they can withhold payment if as the seller, you have failed to fulfill the order on time and to specification. As long as you hold up to your end of the agreement, you can challenge any late payment by a customer on solid ground.

Even the best forecasting isn’t always sufficient to ensuring healthy cash, however. If your forecast reveals a predicted shortfall, you’re going to have to have in place a detailed plan to cover your costs. Obviously, cash is the best way to cover any deficits, but there are also many financing options, such as talking to your investors or bank manager. Obviously, you’ll want to make sure that your cash flow problems aren’t a matter of an ineffective marketing strategy.

The key to all of this is that as soon as you recognise a potential cash flow problem, you need to communicate this to the relevant parties. If you don’t think you’ll be able to make a payment for supplies on time, but you know this a few weeks ahead of time, you can let your suppliers know. They might be able to accommodate your issue, and show some leeway if you normally pay on time, perhaps offering a slightly delayed payment without penalty. You’ll also have plenty of time to try to source some financing, so early communication with your bank or investors is crucial. While you may not be able to avoid penalties by late payment, letting your creditors know is always important, because you may be able to avoid potential legal action.

Factoring

One particularly popular form of business lending is called factoring. It basically gives money to tide a business over until its customers pay their invoices. A factoring company will offer a business about 80% of the value of the contract as soon as the goods are delivered. When the customer eventually pays the invoice, the factoring company will give the supplier the balance, minus a small commission, and take the full payment from the customer. This arrangement essentially allows your business to not only get paid the majority of your invoice up front, but also protects you against bad debt, in exchange for a service fee of anywhere between half a percent and 3.5%.

Invoice Discounting

Along the same lines as factoring is invoice discounting. Like factoring, invoice discounting allows a company to collect money from its invoices up front, in exchange for a fee paid on completion of the invoice. Finance firms generally only offer discounting to companies with annual turnover of over £500,000. Additionally, discounters may refuse financing if they feel there is a substantial risk that the customer won’t pay the invoice on time. In addition to being more expensive than some other forms of financing, such as bank loans or overdrafts, invoice discounting can also have the undesirable effect of drawing negative attention to a company’s finances. If you are seen to be financing your debts, your customers might be reluctant to offer good credit terms, because they might suspect you of being under financial duress.

Don’t let yourself become one of the many casualties of the business world because of poor cash flow management. A combination of good forecasting, organisational discipline, and regular evaluation of your cash flow situation will keep you from being a victim of unhealthy cash flow. For more information on other methods of funding your business, check out our Raising Money For Your Start up blog post.

Update 21st November

We were contacted by financial startup MarketInvoice who are setting their sights on reinventing factoring, and they had this to say about traditional factoring:

Traditional factoring and invoice financing facilities have a negative reputation as they’re expensive; they include service fees (i.e. ongoing & arrangement fees) and contractual lock-ins whereby all invoices from a company must flow through the factor. Costs are typically difficult for companies to understand and are often hidden. It’s not confidential to end customers; the factoring provider will phone up debtors and chase the debt. They require personal guarantees or all asset debentures for collateral, and additionally the terms can be scaled up and down at the whim of the provider.

MarketInvoice have developed a cloud-based solution to address these issues:

Costs are competitive as a pool of global institutional investors compete among themselves to provide up to 90% cash advance on invoices. Companies are only charged a variable discount fee (set by the winning bidder) and a fixed, purely transactional, fee of 0.5% of the face value of the invoice. Overall costs of finance are often as low as 1% per month. Prices are fully transparent so that companies always know exactly how much they’re paying for finance and there are absolutely no hidden costs. MarketInvoice is completely flexible. Companies can use the service only when they need to and are only charged if they use it. It does not charge any ongoing fees or arrangement fees. The service is completely confidential to end customers, preserving the integrity of our client’s business relationships. Finally, MarketInvoice does not require any sort of personal guarantees or all asset debentures.

Andrew Connolly

Andrew is a key member of the Duedil team. In addition to coordinating Duedil’s research, social media and PR efforts, Andrew also regularly blogs about useful information for startups and business owners. Duedil is the world’s largest free database of company information. Using data gathered from a variety of sources, including Companies House, Duedil presents business owners, startups, venture capitalists, and the otherwise curious with key insight into any company in the UK and Ireland.