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Blog

Cash Flow Growth

15/02/2019
Finance, NXD

Finance & The Importance of Getting Your Money In On Time

I just want to do a daily pit stop with you about finance and the importance of getting your money in on time.

Just sort of been working with a client today.

A well-established business.

Good governance and good controls in place.

Apart from some obvious finance sort of improvements, and even if you think that you’ve got your business dialled in and there’s not much more you can do, let me tell you, marginal gains, you can always improve on it.

Here’s an example.A particular company got three types of sort of funding in the business.

  • They’ve got the cash, which is reserved.
  • They’ve got a reserve overdraft in case of peak periods in the month.
  • They’ve got an invoice financing solution that is meant to be as a last resort.

So whilst it’s not always wise to use all your cash, and I just want to be clear on that, in this case, the example I’m saying is if you use cash to start with, trade, and that’s the most cost-effective way of doing that.

Bounce into your overdraft as you need pinch periods, and then, maybe factor or invoice finance a few is a third last resort.

So one, two, three.

So here’s the play.

Getting The Right Balance

We’ve just done an audit on the books, and what we’re finding is that they’re taking between 21 and 30 days to actually invoice clients, and then, they’re giving them standard terms and different customers have got 30, 45, or 60-day credit terms.

So you can see what’s happening here, The delay of 21 to 30 days just to invoice them before they actually then sort of put them on a ledger.

It’s causing some pain, so naturally, they’re getting some hard-core overdraft issue here.

Then, in this particular case, we’ve had a demand, where we’ve had to have several thousand pounds or several tens of thousands of pounds put onto invoice financing.

For you guys who don’t know what that is, it’s where you’re basically selling your invoices to accelerate the payment.

So, we use an example with three marker pens.

The green being their cash flow, the blue being the standard terms, and red being the amount of money that they need to borrow to trade.

And what was happening is, the credit terms that were given out on the delays and invoices, which means they weren’t getting the money for between 60 and 120 days, which was creating a big demand to use overdraft and invoice factoring, which you know can be 12% per annum, 20% per annum based on debt, and security, and risk factors.

So the margins were totally wrong.

The businesses sat there saying, we made over 30,000 pounds last month, why is it not in the bank?

It’s not in the bank, because you’re having to accelerate your invoices at a significant cost, whilst not invoicing money out.

The balance of the ratio was all wrong.

So, if you’re still sticking with me and following me here, what I want you to do is a quick exercise, is go and have a look at all the invoices, and how quick that you’re invoicing out.

How can you prove the credit terms to your clients, and furthermore, how can you reduce the amount of money that you’re having to borrow, whether that be overdraft invoice financing or invoice factoring, or increase the bank balance if you’re a cash positive business?

Instead of going down to a lower balance, increase the higher balance and have more security.

At the end of the day, it’s your money, it’s the terms that you’ve given.

Get Your Finances In Order

I just find it amazing and strange that companies are reluctant to invoice people or chase them for money when it’s due, but yet is quite happy to hit the buttons on invoice financing systems, and draw down money, or just blatantly trading when they got hardcore overdraft areas, at significant costs.

So these marginal gains on your finance, I hope you find that valuable, sit down with your accountant, sit down with the person in your office who does finance, get to look at the average get a day, average credit a day, what the cost of borrowing money is.

If you can see that, you’re going to see a significant positive increase in your bank balance, to get your money in on time, you’re going to be able to manage your creditors and your debtors a lot better, and ultimately your banking and finance charges are going to reduce.

Then track out day 1 to day 31 in the month, work out where all of your peak invoices and your costs, like salaries, taxes, direct debits go out, work out where your payments are going to come in, and just start to dial in and start to improve those periods.

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Mike Midgley

Mike Midgley is the Strategy Director at 6teen30 Digital and a dynamic digital entrepreneur, nxd, strategist, public speaker and host of TheOpenMike Podcast show & Co-Host at The Inbound Podcast. Mike has achieved successful six and seven-figure exits over a 25-year career, raised in excess of £1.6m [$2.5m] in Venture Capital and highly experienced with franchising.