How to improve Cash Flow in your business — nothing else matters if this is not a priority

David Lonergan
Jul 20, 2017 · 6 min read

In any organisation, positive cash flow is critical for survival. Without this, an organisation will be not succeed, irrespective of both the quality of the product or service it delivers, and the talent within the organisation.

This is certainly the case in professional services businesses, where cash received for work undertaken for clients occurs well after the organisation has paid its staff and its suppliers / overhead costs. Figure 1 below sets out a typical cash flow cycle in a professional services based business that takes on average, 60 days from the time of invoicing a client to collecting payment for its services.

Figure 1 — Cash flow cycle

As this cycle demonstrates, from the beginning of a month, consultants will be working on projects and it is not until day 81 that cash will be collected for the projects worked on between the start of the month and the invoicing date. Based on a fortnightly pay cycle for staff, the organisation will pay its staff five times and pay its regular overhead costs (rent, communications, and other office costs) twice before it collects payment for services provided.

Set out below are twelve strategies to consider implementing to improve cash flow collection in a professional services organisation.

1) Communicate the importance of cash flow management across the organisation

The first step in improving cash flow across an organisation is to communicate the importance of cash flow management across the organisation, and that it is not purely a responsibility of an organisations finance department / accounts staff, but ownership should be broad based across the organisation.

2) Embed a culture of cash flow management across the organisation

After communicating the importance of cash flow management, the organisation will begin to understand its importance. Although this strategy will take time to achieve, it is important that the organisation sees and embeds the collection of payment for work undertaken as a critical component of the project management process. The success of this will also need to be driven by the entire leadership team reinforcing the importance of cash flow discipline across the organisation on a regular basis. Setting and communicating targets / KPIs, establishing a debtor collection policy, cash flow forecasting, reporting progress against targets (all discussed below) and building ownership of cash flow management across the organisation are important elements in successfully embedding a strong cash flow discipline into an organisations thoughts and way of doing business. Another strategy to consider is linking a component of any individual incentive scheme arrangements to the achievement of cash flow targets.

3) Establish appropriate targets / KPIs for cash flow management and measure progress against these targets

A critical element in embedding a culture of cash flow management across an organisation is to set and communicate targets / KPIs centred on cash flow management. Visibility of these targets establishes clear expectations around cash flow management and allows for the measurement of progress against these targets. Tracking of cash flow should occur on a daily or weekly basis and be communicated to the management team. More broadly, information should be made available to all managers responsible for projects to ensure they have visibility of their debtors and are able to more readily follow up on overdue debtors.

For a list of possible KPIs, look out for my upcoming post on KPIs for professional services based organisations.

4) Implement a rolling daily or weekly cash flow forecast

Preparing a rolling daily or weekly cash flow forecast is critical in gaining an understanding of and visibility of cash flows across an organisation. The cash outflow side of this rolling forecast can be forecasted accurately, and will include wages, overhead costs, contractors, tax payments (GST, FBT, PAYG, income tax), capital expenditure, and debt repayments. Take time to prepare a detailed an accurate build up of the cash outflow side of this forecast. Undertaking this exercise gives clear sight on upcoming payments and allows organisations to understand their cash flow cycle, improve cash flow management, and plan future expenditure with more certainty.

5) Utilise technology

The majority of accounting packages provide for the distribution of emails to clients via email. This will reduce the time spent in the client receiving the invoice, avoid it sitting on someone’s desk for a period of time, and is more likely to ensure the invoice is sent to the correct person upfront. This also eliminates the possibility of the invoice being misplaced or lost. In addition, sending statements on a regular basis to clients is a feature in many accounting packages and should be implemented.

6) Optimise or establish a debtor collection process

Undertake a review of the existing debtor management policy in the organisation, or if there is no policy, implement a policy that sets out guidelines on cash collection. This should incorporate procedures to ensure follow up of debtors as soon as they become overdue, and not when an invoice is 30 days overdue or when cash is low, and set out who is responsible for following up clients including frequency of follow up. Following up on invoices as soon as they fall overdue also enables an awareness of any issues associated with the project (if not already known). Setting out ownership of the steps in this process is crucial.

7) Manage Work in Progress (WIP) tightly across the organisation

If your organisation has a process of recognising and carrying WIP, this should be reviewed and managed tightly. Tracking the age of WIP and ensuring WIP is cleared out as soon as a milestone is reached is another important cash flow management strategy. Looking back at the cash flow cycle, if work undertaken is not invoiced in the month but recorded as WIP and invoiced the following month, this adds another 30 days to the cash collection cycle.

8) Upfront payment / credit checks / payment plans

Undertaking a credit check on new clients can provide a level of comfort over only taking on clients with the capacity to pay for services provided.

Upfront payments should be considered for new clients on at least the initial assignment. In addition, if a client has overdue debts, consider offering a payment plan to pay off the debt over a period of time.

9) Correct details on an invoice

Time should be taken to ensure the invoice is prepared with the correct information before it is sent. Confirm the organisation name the invoice is addressed to is correct, and contains all the information needed by the client. Where a purchase order has been issued, ensure this number is listed on the invoice

10) Invoice in a timely manner

If a project is completed during a month, prepare and send an invoice rather than waiting for the monthly billing process to commence.

11) Recognise effort across the organisation

It cannot be underestimated how important recognition of effort is to ensure the success of building a cash flow management discipline across an organisation. The achievements and wins that are made should be communicated and recognised within the organisation.

12) Drive a culture of service excellence

Whilst this suggestion is not directly related to cash flow management, in my experience focusing on delivering service excellence and high quality work to your clients will lead to clients paying their invoices on time (and sometimes early).

Finally, an important distinction to make is that profit does not equal cash flow. Organisations often focus on profitability as the number one financial performance metric, however, profit does not equal cash, and cash flow should have equal status across an organisation. It is the fuel that keeps organisations running, regardless of the size and maturity of an organisation.

These strategies, if implemented, can lead to significant improvements in cash flow across an organisation, resulting in a stronger balance sheet, the ability to be better positioned to fund growth initiatives, and ultimately deliver improved financial returns for shareholders.

)

Written by

CFO with 17 years experience in multiple industries. Positive, motivated approach. Serving others and adding value are my two primary goals. Accountability key.

Welcome to a place where words matter. On Medium, smart voices and original ideas take center stage - with no ads in sight. Watch
Follow all the topics you care about, and we’ll deliver the best stories for you to your homepage and inbox. Explore
Get unlimited access to the best stories on Medium — and support writers while you’re at it. Just $5/month. Upgrade