Cash flow woes are common at the start of a new year, with SMEs often struggling to make ends meet in January. But there is a range of ways to improve your situation.
Jamie Bishop, partner at McLean Delmo Bentleys, says having a cash flow budget in place is the best way to manage and monitor cash as it flows through a business.
“Actual performance should be regularly compared to the budget. Budget versus actual reporting should identify potential cash flow issues before it’s too late,” Bishop says.
Read more: Mastering cash flow management
Another method to improve cash flow is to reduce the amount of working capital required to fund the trading cycle. This can create ‘free cash’, Bishop says.
A business can do this by reducing the level of stock, by ordering more regularly from your suppliers, and holding less stock on hand, he explains.
“You could also rationalise your product range to reduce the number of items on offer, and concentrate on high margin and high turnover products. And consider regularly reviewing stock to identify slow-moving, damaged and obsolete items. Then, devise a strategy to liquidate these items.”
Other methods include placing controls over the stock ordering process and carry stock on consignment if possible, he says.
There are a number of options available in the open market that allow businesses to improve cash flow by obtaining longer credit terms while not impacting on the supplier, according to Octet Finance managing director Clive Isenberg.
According to Isenberg, you should identify all cash flow options that are available outside a business secured financing arrangement, such as a credit card.
“In today’s business world, just about all SMEs have personal and corporate credit cards invariably being used for entertainment and travel, and with a large amount of unutilised credit limits,” he says.
“All of these cards can be used for paying both domestic and international creditors and the timing of payment could also extend a business credit term by another 55 days.”
Resist the temptation to have your customers dictate payment terms, advises Michael Prior of accounting firm PB Advisory Group.
“There’s a growing trend among multinationals to extend their payment terms out to 90 days. You must determine if this business is worth it. Can you afford to provide credit for 90 days? Most small businesses can’t, but your cash flow plan will tell you. So when you get a new client, make sure you’re up front about your payment terms,” Prior says.
On the other hand, if you don’t have to pay a bill until the 30th of the month, then don’t. However, do pay it promptly when due.
“Just remember, you’re a supplier to your customers, and you wouldn’t appreciate them not paying, so give your suppliers the same courtesy,” he says.
Improving debtor days can have a dramatic impact on cash flow, according to the chief executive of debtor finance firm Scottish Pacific, Peter Langham.
“Improving debtor days – the average time taken by customers to pay invoices – can have a dramatic impact on cash flow,” he says.
For example, a business turning over $10 million that reduces debtor days from 60 to 55 days achieves a cash inflow in excess of $135,000.
“Often, something as simple as improving paperwork (and making sure invoices show all the relevant information required by the customer to make payment,) sending timely reminders and putting in place a disciplined reminder call program, will help reduce debtor days,” Langham says.
So many SMEs struggle with invoicing dramas because they don’t invoice until the end of the week or month.
Walking away from a job without sending the invoice can be financial suicide, says Chris Strode, founder of business app Invoice2Go.
“The best way to keep the cash flowing in your business is to invoice on the spot, which shows the customer you’re serious about your business. Many business owners that do invoice on the spot report getting paid the same day, so be sure not to walk away from the job without sending the invoice first again.”
Small business owners aren’t doing themselves any favours by not being upfront about their payment terms, Strode adds.
“Don’t try and win customers over by being vague about when you want to get paid, or by offering long payment terms, because you’re only doing yourself a major disservice,” he says.
“You’re running a business, which means that cash flow is paramount. While 30 days are common payment terms, it’s just not necessary to wait an entire month to be paid. And really, why would you offer 14 day terms when you can just put seven days on all of your invoices?”
Put aside a percentage of your income into a separate savings account as soon as it hits your bank account. If a client pays you, transfer at around 20% to 30% into another account towards GST, superannuation, company tax and the like, adds Sophie Andrews, director of The Accounts Studio.
“It’s all too easy to spend what’s in the bank and not prepare for future BAS and tax bills, then suddenly you find you have a large bill from the tax office and no funds to pay for it,” Andrews says.
Scores of potentially viable businesses fail every day due to cash flow issues, Andrews adds.
“Many talented and capable entrepreneurs with great ideas have watched their companies go to the wall because the amount of cash flowing out of the business exceeded the amount of cash flowing in.
“Understanding your cash flow will reduce a lot of the stress associated with running a business, with proper forecasting, you’ll be able to see when and where cash flow issues are likely to strike,” she says.
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