Problems with cash flow are a key hurdle to overcome for many tradespeople. Good cash flow management keeps costs down such as overdraft charges, ensures good relationships with suppliers and can even help you to win new customers by providing more flexible payment terms.
Here are 5 ways to improve cash flow;
1. Use a payment service to encourage prompt payment of invoices.
There are countless payment services out there. A good example is Stripe integrating with Xero cloud accounting software. A payment button is included on invoices sent to customers via Xero making it easier for customers to pay. Including a payment service can lead to payments being completed earlier (up to 17 days according to Stripe) than they otherwise would.
More information can be found here - www.xero.com/stripe
2. For regular re-occurring jobs use a direct debit service.
If you bill a customer for a re-occurring amount each month then using a direct debit service like Go Cardless is a no brainier. Go Cardless integrates with Xero and enables customers to set up a direct debit for a set amount each week or month. This saves the customer time as they don't have to pay you manually, it also saves you time chasing the customer up. Go Cardless also works well where a customer is paying you in set installments for a large job such as a refurbishment.
More information can be found here - www.gocardless.com/xero
3. Automatically chase payments.
Cloud software such as Xero enables automatic reminders to be set up for customers. For example, if an invoice is 7 or 14 days overdue you can set an email to be automatically sent to remind the customer that payment is due. You could also set reminders to send to yourself if you would prefer to call the customer.
4. Ensure you are charging and claiming the correct VAT.
VAT is a useful tool for managing cash flow for many businesses. For example, if you are VAT registered and charge £1,000 + VAT for a job (£1,200 in total, £200 of VAT) with materials costing £600 (£100 of VAT) then £100 of VAT will be held in your account to pay HMRC in the next VAT return which could be up to 4 months and 7 days away, your net bank balance will be £600. If you hadn't charged VAT then only £1,000 would be paid by the customer with £600 still paid out for materials (as the supplier is VAT registered) so your net bank balance is only £400.
Only businesses than turnover more than £85,000 per year need to register for VAT but you can voluntarily register. It pays to do this if you are buying a lot of materials from trade suppliers that are VAT registered.
5. Speak to suppliers to see if you can improve payment terms.
If you have a good relationship with a supplier and are purchasing a significant quantity of materials on a regular basis then it is worth contacting suppliers to ask for better payment terms, they may agree to you paying 30, 60 or even 90 days after the purchase of materials if you have a good payment history. This can also enable you to offer more flexible payments terms to customers and make your business more attractive when bidding for tenders.
This is something your accountant can help with as suppliers may require financial statements to demonstrate the health of your business and make the case for improved terms.
Matrix Accountancy Services specialises in helping tradespeople with their accounting.
To arrange a free consultation contact firstname.lastname@example.org or call 07914 794744.
There is more information here - www.matrix-accounts.com/tradespeople