While it looks like the UK will avoid a full-on recession this year, the economic environment is uncertain due to interest rates rising to their highest level since 2008 and inflation leading to an increased cost of doing business.
This creates many challenges for MDs, including finding it harder to forecast sales, higher supplier costs and the risk of being unable to make monthly payroll and pay suppliers on time.
Follow our tips below to firefight in the short term and increase the longer-term sustainability of your business.
Don’t do the finance yourself
Don’t be tempted to maintain your own accounting records. As MD, your skills will be better used elsewhere. Your priorities should be setting the strategy, raising finance and accessing and retaining talent.
Employing a finance director or working with an outsourcing accounting firm to maintain the books will ensure they are delivered accurately and to a high standard.
Have access to timely financial data
Using cloud accounting software, such as Xero, QuickBooks or Sage Business Cloud, will allow your accounting records to be completed in close to real-time by using automation features, including imported bank feeds, receipt scanning tools and repeating monthly journals.
This removes the bulk of manual work from everyday transactions, enabling your finance director or outsourced accounting firm to close your monthly management accounts promptly and giving you an accurate view of your financial position.
Implement scenario planning
Incorporating scenario planning by adopting forecasting software will allow you to plan for various situations, including a drop in sales, slower cash collection and entry into new markets.
If proposed scenarios flag the possibility of cash shortfalls, you can seek to introduce a contingency plan to mitigate this risk.
Lock in costs and seek alternative suppliers
To prevent the likelihood of core suppliers increasing their costs, see if you can lock in today’s prices for the year ahead by committing to a minimum spend or volume of orders.
Also seek out at least one alternative supplier for each core component of your supply chain. This will give you a backup option if a key supplier goes out of business and can also be used as an alternative if your first choice puts up their prices.
Pay suppliers just on time with Faster Payments
A quick win to boost your working capital is paying your bills with Faster Payments. Unlike the more widely used BACs, which take three working days to clear, Faster Payments transactions clear within 90 seconds.
By using the Faster Payments network, you can pay suppliers on the exact date bills fall due so that cash isn’t unnecessarily tied up before it clears.
Additionally, the instant clearing nature of Faster Payments means it is easier to maintain accurate cash flow forecasts that don’t require cash-in-transit journals for transactions that haven’t yet cleared.
Tackle late payments
Late payments put both a mental and financial toll on businesses.
Research from Xero shows that more than two-fifths of SMB owners claim that late payments have affected their mental health.
And the problem is widespread, with almost 9 in 10 business reporting that they are typically paid late, according to The 2022 late payments report.
These late payments and their negative impacts can be mitigated through a variety of ways, including prompt invoicing, the inclusion of paylinks to a payment gateway on invoices and payment reminder messages.
By implementing an effective invoicing and collections process, you can reduce payment times and bolster your working capital. See this guidance on maximising cash flow through your invoicing and collections process, from Chaser and Xero.
Credit check new and existing customers
Credit checking new and existing customers will help flag the risk of late payments before they arise. Once you know what to look out for on a credit report, they can become an indispensable tool to help protect your business from bad payers.
Using a tool like Chaser can flag any red alerts for companies on an ongoing basis. When an adverse financial event arises, you should respond by making extra efforts to collect outstanding funds and potentially reduce credit terms going forwards.
You can still take on new customers with poor credit scores but revisit your payment terms and insist on their invoices being paid upfront, either partially or in full.
Seek to roll out a subscription service
Rolling out a subscription service, with customers purchasing the same value of products or services each month, will allow you to forecast demand and have a more accurate picture of your future cash flow, providing you have a low attrition rate.
Fees for subscription services can be collected effortlessly via a Direct Debit mandate which should be set up the at the start of custom relationships.
Put a drawdown facility in place
Drawdown facilities are one of the most flexible forms of financing and operate similarly to overdrafts. They can be used to plug short-term cash gaps, and unlike standard loans, you only pay fees related to the value of the facility used, alongside the time period funds were accessed for.
Even if they aren’t used, this can give you peace of mind that they are a relatively cheap and instant form of short-term finance.
Futureproof your business today
Taking the above actions will give you peace of mind that you have taken a holistic approach to securing the future of your company.
This will also result in longer-term benefits to demonstrate sustainable growth due to the roll-out of streamlined processes, reduced costs, and better access to real-time data that can be used to enhance strategic decision-making.