Manage your cash flow like a pro in the first year

Whether you’re learning about the importance of cash flow by experience or by error, here are several ways to navigate the tricky issue in your early stages of business

1.Manage slow payment times

If there’s one factor that affects a startup just as much as a large corporation in Australia, it’s that invoice payment times are getting longer. The latest research from Dun & Bradstreet’s Trade Payments Analysis now shows that invoices take an average of 56 days to be paid –the slowest rate in three years. So how do you avoid this problem, especially when ‘cash is king’?

According to Dun & Bradstreet CEO Gareth Jones, there are two things you can do.

“You can build incentives and discounts for early payment into your pricing model, or you can make it clear there are repercussions, like interest on the amount outstanding, for those who don’t pay within your timeframe,” he says. “It all comes back to your credit policy.”

2.Have a clear credit policy

As Jones outlines, a clear credit policy is essential for every startup but he says many people don’t think it through upfront.

“You must have a clear policy around how you’re going to extend credit to your customers,” he says. “It needs to take into account the cycle of your outgoings versus your proposed income. Your credit policy must reflect when you see income arriving and therefore cash arriving, against your outgoings in terms of buying goods from suppliers and other business expenses.”

3.Hold onto your cash for longer, and plan ahead

It’s also important as a startup to keep cash in your bank account for as long as possible, so you’re prepared for unexpected challenges.

“No matter what you plan for, something will happen that you’re not aware of,” says Kevin Moore, retail expert and chairman of Crossmark Asia-Pacific Holdings.

“A plan is great to say ‘this is the number I want to get to, this is how much I want to turn over, and this is how much I want my costs to be. If you’re continually checking against it, you can say, ‘I think we’re off track and we need to do something about it’ before it gets out of hand.”

4.Negotiate favourable payment terms

Moore also recommends that you negotiate favourable payment terms as a strategy for holding onto your cash for longer.

“Make sure your payment terms are the best they can possibly be. I know it’s difficult, but you have to be strong in this area. Whether you can get 15, 30, 45 day terms, whatever you can get, make sure it’s the best option for you. Large corporations have procurement departments whose role it is to use you as the bank, but if you’ve got a good product or service, be strong in your negotiations.”

5.Efficient and accurate invoicing

In a similar vein, Jones recommends that you examine your invoicing process closely, to ensure you’re not giving customers or suppliers a reason not to pay.

“Make sure you have a good invoicing process. Often your customers or their credit departments will look for reasons not to pay, for example, you invoice them and they feel it’s not accurate or there’s mistakes on it. All of those things can delay payment and create cash flow issues. Don’t give people a reason not to pay you,” he says.

6.Understand your finances

Entrepreneurs have many skills, and sometimes numbers isn’t one of them. But that’s not a reason to avoid the books altogether. Moore recommends that you keep it simple, and don’t get confused with accounting speak like debtors and creditors.

“Look at your payables, your receivables and your bank balance three times per week,” he says.

“There’s only three places your money can be if you’re keeping your business together. That’s in the bank, with your suppliers, or waiting to be paid by somebody. Stick to those three things and you’ll have an accurate picture of what’s going on with your cash flow.”

7.Ask for or hire help

Moore also recommends that you be diligent with your monthly P&L and balance sheet review. “Spend 60 minutes minimum on it, and understand what the numbers mean to your cash over the next 90 days.” If you’re not up to this task, don’t be afraid to ask for, or hire, help.

“Once you get a bit bigger, the best thing you can possibly do is employ a really good accounts receivable person,” says Moore. “Don’t get hung up on someone who’s just a bookkeeper or just an accountant. You want someone that’s numerate, confident and a communicator, because they’re asking for money over and over again.”

Written by: Megan Gamble

This article is sponsored by Australia and New Zealand Banking Group Limited ABN 11 005 357 522 (ANZ). The views and recommendations that are made in this document are those of the author and not ANZ. To the extent permitted by law, ANZ disclaims liability or responsibility to any person for any direct or indirect loss or damage that may result from any act or omission by any person in relation to this material..