Tuesday 25th Jun 2019
The business service sector is one of the few sectors that’s seen positive, year-on year growth in 2019 and a recent article from Deloitte notes that “12 out of the 50 fastest growing occupations now fall within the business services sector”. It’s not all plain sailing though. Businesses operating in the sector are struggling to cope with increased pressure on their profit margins and frequently run into trouble while trying to grow their core offering.
Cashflow can still be a real issue for business operating in the PBS sector too. Particularly SMEs that lack the capital reserves needed to cope with the late payment of invoices, new startups that haven't managed to optimise their financial processes, or businesses that need to pay large numbers of subcontractors on a semi-regular basis.
According to a government report published in 2018, accounting firms, IT support companies and outsourcing specialists all struggle with cash flow problems at some point in their lifecycle.
In this article, we’re going to look at a brief 4-step strategy that can help businesses in this sector cope with cash flow issues.
- Digitize and automate your invoicing process
Unpaid or late invoices can quickly cause cash flow issues. Companies with a large payroll and/or a lot of monthly outgoings often run into problems when clients fail to pay invoices before bills are due, which is why it’s important to do everything you can to expedite your invoice recovery process. Studies show that clients are much more likely to pay invoices if they’re presented in a timely and accurate manner. This means that it’s always a good idea to ensure that your invoices:
- Are issued (and arrive) as quickly as possible
- Contain the correct billing and payment information
- Are presented in a clearly legible format
Emailing invoices - or using a digital platform like Sagepay to issue them automatically - ensures that your invoices will arrive on time, and increase your chances of getting paid quickly. Switching to digital invoicing can also cut down on the time it takes to issue your invoicing, saving you more money in the long run. Just make sure you talk to your clients about what they need to see on your invoices. Some companies have very specific requirements and a digital template will need to accommodate all of your customers.
- Explore opportunities to lease important assets
Buying equipment, real estate and other, expensive assets can put a lot of strain on your finances and deplete your capital reserves. To avoid this issue and ensure that you’re maximising the amount of liquid capital in your business accounts, you could look for opportunities to lease essential equipment. Particularly if your sector, processes or market demand that you constantly supply staff with vehicles, computers or company phones.
You may end up spending slightly more in the long run, but leases are normally paid in small installments which will leave you more ready cash to finance new growth initiatives.
- Incentivise prompt payment
28-30 day payment cycles used to be the norm, but more and more companies are moving towards a model where they pay suppliers in 7 or even 5 day installments. If you’re keen to improve your cash flow and reduce the amount of unpaid invoices you have to deal with every month, you could consider talking to your customers, and requesting a shorter payment window.
This strategy works best if you pair it with some kind of incentive. Many companies are starting to offer small discounts for prompt payment (1-2%) and it is worth remembering that these discounts tend to pay for themselves by reducing the costs associated with poor cash flow and the debt recovery process. That said, you could also look at charging interest for slow payment instead.
- Explore invoice financing options
Sometimes it’s all but impossible to receive prompt payment from clients, which is why so many business service providers struggle with cash flow issues. If you’ve tried digitizing your invoicing process and offering incentives for prompt payment, it may be worth exploring invoice financing as an alternative strategy for cash flow management.
Invoice financing is a service that allows you to recoup up to 90% of an invoice before your client has paid. This enables you to ensure good cash flow, and removes the need to chase clients instead of growing your business. Read a case study on how it helped a recruitment provider here.