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Anticipate your cash flow requirements in four steps

By Pelletier Loic, 2:00 PM on June 3, 2016

Receiving payment is generally far removed from the signing of a contract and is often subject to the vagaries of the project. It is also sometimes necessary to increase production capacity in order to complete a project, involving added investment and, by extension, expenditure. How can we best anticipate cash flow requirements to ensure that the business runs smoothly?

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1. Closely monitoring cash receipts and expenditures

In order to ensure that your incoming and outgoing payments function smoothly, it is necessary to begin by meticulously monitoring all activity on the company bank account(s) and to log this activity on your cash flow tracking tool on a daily basis.

This may seem obvious, but it is the basis for sound cash flow management. You cannot obtain a good idea of your cash flow projections and therefore your requirements if this step is not rigorously followed.

2. Precise payment terms

Every contract (and therefore every invoice) should include payment terms, be they stipulated in the general conditions of sale, or included as a dispensation following negotiation with the customer. Consider also monitoring and tracking the payment terms of your suppliers so that they can also be included in your cash flow tracking tool.

The rule is simple: one invoice = one (or more) realistic due date(s) for payment.

Our tips for good payment management:

  • Chase up any invoices that do not contain payment terms.
  • Remember to do this for your own supplier invoices, as outgoings are as important as receipts in anticipating cash flow.
  • Invoice early: rather than submitting all invoices at the end of the month, invoicing on an ad-hoc basis allows for extra days of liquidity and helps avoid accounting bottlenecks at the end of the month.
  • Review your existing practices with respect to payment terms, with a view towards harmonisation and introducing uniform General Conditions of Sale.
  • Consider making all "non-invoice" payments (e.g. electricity, rent, wages) on a monthly basis for clarity and to make the task more manageable.

3. The complexity of determining when to invoice

Fixed price invoicing is theoretically the easiest to anticipate; "theoretically" here being the operative word! Fixed price projects are often divided into milestones, after each of which an invoice is issued. It is necessary to work closely with operational staff and to agree the most current dates for invoice. Do not assume these for yourself (e.g. "let's just go with three months after"). Acknowledge that you do not know the situation and that the reality is on site. Remember also that handover of a deliverable does not always entail an immediate invoice, check the contract with the customer to be sure.

For cost-plus contract invoicing, the process is more uncertain because you must also take the detailed scheduling of services into consideration. Here also, working closely with those engaged in production, the operational staff, is crucial: the more accurate their schedule, the more reliable your forecasts.

All in all, only by following these three steps will your cash flow forecast be reliable: meticulously monitoring the present situation, making reliable forecasts for all due dates for existing invoices and ensuring the reliability of what is yet to be invoiced.

4. One last piece of advice...

Be realistic! If a customer has been 10 days late in paying its last 15 invoices, factor this into your forecast: there is no point in wishful thinking, cash flow planning is a pessimistic exercise!

An indicator that provides information on client risk and enables you to measure efficiency in payment collection. An article detailing the various methods of calculating DSO can be found here.

In this respect, using an ERP can streamline and centralise this information, making cash flow planning generally more reliable and acting as a dashboard from which to gain better insights and make better decisions.

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