Cash flow is the one of the most important factors when it comes to running a business. It doesn’t matter how great your product is, or how many customers you serve. If your business runs out of cash, you can’t keep the lights on and you can’t pay your staff. Everything comes grinding to a halt. To avoid this happening, here are five things you can do to improve your business cash flow.
1. Prepare a cash flow budget and use it!
By mapping out big cash expenditures for the year ahead, you won’t be caught with your cash flow pants down. Tax and GST payments to the ATO are just one example of a large, regular outflow of cash that needs to be planned for. If you know that you need to pay the tax man in 3 months time, it makes sense to start socking the cash into a savings account so that when the time comes, you have the necessary cash allocated.
2. Reduce payment terms for customers
If you are currently offering 30 or 45 day terms to your customers, it might be time to consider tightening these up to 14 days. Most customers will only pay your bill once the payment term rolls around – it is a rare (and wonderful!) customer that pays you early. Therefore it makes sense to tighten your terms to 14 days as that will most likely result in you receiving payment between 14 to 28 days.
3. Chase your debtors and have a debtor policy
It doesn’t matter how many invoices you issue to customers – if the invoices aren’t getting paid, then YOU aren’t getting paid. If your invoices are on 14 day terms, you need to follow up with a phone call on the 14th day and remind your customer that the invoice is due and payable. If it remains unpaid, you need to regularly contact your customer and request a deadline for payment or perhaps organise a payment arrangement. You can’t just sit around and hope that your initial invoice gets paid, as the longer it drags on, the more likely it is that the invoice will remain unpaid.
4. Have an emergency fund or credit facility
Unexpected cash outflows can happen, such as a computer server blowing up. A downturn in your business can also mean that sales plummet temporarily, however the bills still need to be paid. At times like this, it can be handy to have access to a cash savings account that has been set aside for this purpose. Access to a credit card or line of credit can also help, however it would need to repaid as soon as practicable to ensure interest costs are kept to a minimum.
5. Set up direct debits
If your business type can support it, then setting up direct debits for customers can be an excellent cash flow tool both for yourself and your customer. It means that you don’t need to chase your customer repeatedly for payment as their account is debited automatically. This is a win-win as your customer doesn’t need to waste time manually paying you and they can also budget for the cash outflow which they know happens regularly for a fixed amount.
Keeping on top of your cash flow is extremely important to business survival. We hope you manage to incorporate some of the five ideas above into your business. If you would like to discuss this further or have any questions, please contact us.