You may have heard the saying “cash is king”— here’s a guide for keeping a grasp on the cash in your business.
If you are a small to medium sized business owner and you’ve found yourself losing sleep over your business expenses at one point or another then you aren’t alone.
Cashflow issues in small to medium enterprises (SMEs) are boiling over. According to a report released earlier this year by The Invoice Market, Australia’s SMEs are weighted down by $76 billion worth of outstanding invoices, which averages out to about $38,000 for each business. This is the sort of burden that puts a huge hole in the cashflow of SMEs and cripples their growth into the future.
To make sure the money is in your account when those costly expenses come due here are five tips for getting on top of your cashflow:
1. Form a detailed cashflow projection
Creating a forward cashflow budget might seem like an obvious solution, but considering how time-poor most business owners are this doesn’t always happen. Taking the time to get your bookkeeping up to date, examine your previous cashflow and make some forecasts on a regular basis will be invaluable to your cashflow.
Your future income isn’t always dependent on your customers. If you have mapped out your future expenses such as equipment, supplies, salaries and taxes then you will have a much better idea and focus for your sales targets and strategies.
Your projections will be able to tell you when to take the smaller job with the quicker pay-check rather than the bigger job with the more attractive dollar figure attached.
2. Manage your invoices & debtors closely
A fundamental part of keeping your business cash-rich, or anywhere near it, is to make sure you get paid quickly and on-time. With a strict invoicing and follow-up procedure in place you can make sure your business isn’t suffering from the crisis of unpaid invoices. It begins with issuing the invoice on time. Many companies now use automated invoicing systems to make sure their invoices go out as soon as possible.
Managing your debtors is an important and yet sensitive area, and one you will need to tread carefully. Making the phone call to ask after last month’s invoice isn’t something anybody enjoys, but as part of a strong debtor management procedure it doesn’t need to be too uncomfortable for anyone. Beyond making your new clients fully aware of the trade terms in the beginning, other options such as automated email reminders can also be a useful tool for improving your payment timeframes and making sure your follow-up phone calls are well received.
3. Source flexible cashflow finance facilities
Despite all their efforts some businesses are going to need to lean on credit facilities from time to time. This is not unusual and doesn’t reflect the success of your business. Putting flexible working capital facilities in place is often a good thing to do as a security measure before you reach a shortfall or growth period.
Common cashflow finance options include business overdrafts, debtor finance and trade finance facilities. In some instances, your cashflow might be improved in other ways, such as financing equipment rather than hiring it. Speaking to your broker will give you a good idea of everything that is available to you and what is best suited to your business.
4. Negotiate effective terms with your suppliers
When it comes to paying your suppliers you want to hold on to your cash for as long as you can— the opposite of what you want when the shoe is on the other foot. Before you look at negotiating your trade terms remember that unless your supplier is offering a significant discount for early payment it is best to pay your invoices on the due date and no earlier.
If you are under cashflow pressure or the opportunity to negotiate terms arises you should seek to extend your payment period or look at instalment payment options.
Some suppliers will be able to offer these terms and others won’t. Make sure you enter your negotiations with a strategy and take care to maintain a good trading relationship. If you can’t meet your trade terms and you can’t negotiate better terms there are specific financing options to cover these trade costs that may suit your business.
5. Avoid over-stocking
Another common cashflow problem is allowing too much of your working capital to be invested in stock. While your wealth is tied up in this area it is unable to be used for expenditure or invested in other areas of your business that might be more profitable for you.
In some cases, there may be incentives for buying stock in bulk, such as supplier discounts. It is important to remember however that no matter how appealing the incentive is, buying more stock than you need to can create cashflow issues for your business. Before you go ahead with the purchase, have a look at your cashflow projection to see if it will cause problems for you down the line.