Cashflow is the lifeblood of any business, and more SME’s have been destroyed through cashflow issues than from any other cause. The last thing you need is to be stressing about whether you have enough cash to pay your own suppliers rather than focusing on running your business.
So, how can you avoid cashflow crises and create a stable inflow of cash that lets you sleep easily at night?
Cashflow Improvement Method #1: Compare Your Budgeted and Actual Cashflow
When you made your budget for this financial year you predicted your income and expenses so that you could use those figures in your planning (See “Why Every Growing Business Needs a Realistic Budget”). The purpose of this budget was to check whether your cashflow was on target and take action if it is not.
If you are having cashflow issues you need to determine what is at the root of the problem: lack of income, out-of-control expenses, or late payment of accounts by customers are the most common causes. Once you identify the cause, you can do something about it, but it all starts with awareness.
Cashflow Improvement Method #2: Be Clear About Your Payment Terms and Follow Up
You’d be surprised how many businesses forget this step, and it’s one of the easiest ways to improve your cashflow. Clearly defining your payment terms at the start of your relationship can transform the speed at which you are paid, and it also gives you a chance to negotiate.
If you are asking for 7 or 14 days payment and your prospect wants 30, 60, or 90 days you have the opportunity to negotiate a higher fee in return for your concession on terms, and you have the opportunity to ask yourself whether this client is going to be worth working for at all. This also puts you in a much stronger position if they are late paying your invoices because you have already had a discussion about the terms.
Once you have established the terms of payment make sure you follow your clients up quickly and professionally when they are overdue. This increases your client’s respect for the value you deliver, and helps you get paid sooner
Cashflow Improvement Method #3: Invoice Immediately
Businesses which invoice weekly or monthly are more likely to have cashflow problems. If you invoice as soon as you complete a job the chances are you will get paid immediately… or at least on time because a client who has just signed off on a job is probably happy to pay (or at least schedule payment) immediately rather than having it hanging over their head as something to do.
Tradies are particularly guilty of waiting days or weeks to invoice, and often only invoice when they have a cashflow crisis, so using an app, or developing a system that allows you to invoice immediately is an excellent way to improve your cashflow.
Cashflow Improvement Method #4: Plan Ahead for Compulsory Payments
Set aside money as it comes into your account to pay your taxes, GST, and superannuation obligations. It’s best to put this into a separate bank account so you are not tempted to think of it as ‘available cash’ because it really isn’t available at all.
I’ve lost count of the number of business owners who thought they were having an incredibly profitable year, but who discovered that they had forgotten to set aside enough cash to pay their legal obligations and were suddenly plunged into a cashflow crisis in June or December.
Cashflow Improvement Method #5: Consider Ways to Reduce Your Stock Without Affecting Delivery
While many businesses need to have a certain amount of capital tied up in stock so that they can provide efficient and timely service, it’s always worth revisiting your stock levels. From stationery and office supplies to spare parts and widgets your goal should be to have enough to operate your business without interruption, but not too much.
Holding excess stock has an affect on your cashflow as well as on your expenses (warehouse and office space) so it’s important to determine the right levels for your business, and to control it carefully. Lower stock levels also make stocktake easier to manage.
In summary, if you implement one or more of these cashflow improvement methods you will find that the additional cash you have available at any time will increase, and you will also be able to look ahead and see when cashflow problems are likely to occur so that you can work around them.
Cloud CFO provides customised CFO and accounting services to small and medium businesses who want to outsource some or all of their financial management. If you are not sure about your bookkeeping and tax obligations there is still time to talk to us before the end of the financial year.