It is essential to make sure you always have enough cash available to keep your business operating. To do this you need to closely monitor cash ‘inflow’ and ‘outflow’, know how much you have on hand at all times, and how much you need on a day-to-day basis. Every business has peak times and quiet periods, and many are subject to seasonal impacts. Properly managing your cash flow means accounting for cash inflows and building up reserves for capital expenditure or to cover price increases from suppliers, payment delays, or other unexpected costs. It also means planning to cover your cash outflows and making sure you can pay your bills when they’re due in the less busy times.
Managing your income
We regularly generate Aged Debtor reports for our clients, and often see just how much outstanding there is in the 30-60 and 60-90+ days overdue columns. This managing of funds coming in can often be tricky and potentially cause difficult situations to arise with your valued clients. There may well be a very good reason why they haven’t paid, and you might need to offer them a bit more time, but in effect what you’re doing is making your payment terms meaningless and extending your client an open ended line of credit to fund the operations of their business.
- Issuing invoices at the same time as you provide goods or services, rather than leaving it until the end of the month, and offering a discount to customers for paying early, will also help cash inflow.
- Make it easy for customers to pay you quickly. Give them your account details or help them to pay by offering EFTPOS, BPAY or other simple online payment options.
- It is important to be clear about how and when payments should be made. Specifying a pay-by date on your invoices, rather than just saying ‘Due within 30 days’ for example, is one way to help solve this problem.
- Let debtors know how much extra time you’re willing to give and be clear on what your next steps will need to be if they don’t pay on time. But when chasing up payments, always be polite – getting angry or upset is not likely to get you paid any faster and could damage your reputation and client relationships. If you’re really having trouble, you could ask your bookkeeper to assist you with this – they will be experienced in this task. Only consider a letter of demand or speaking to a debt collection agency as a final resort.
- You should also obtain a deposit from customers for more expensive items or large projects, plus encourage late payers by offering a discount for prompt payment or sticking to a payment plan.
Managing your spending
Managing your cash outflow is equally important.
- By checking when you have to pay bills you can work out how to stagger your payments. Pay your bills on the due date, not weeks or months early, and make sure any loans you have suit your needs.
- If you need equipment, find out if it’s more cost-effective to lease or purchase with a loan – and if you do purchase, spread the loan repayments out over the life span of the equipment, keeping your cash for day-to-day expenses.
- Other things to consider are adjusting the amount you pay yourself at times when your cash situation is tight and looking at how you can better use the people you have, rather than employing more people.
Also, make sure you don’t have money tied up in excess stock and bank cash/cheque amounts as you receive them. This will also give you a better idea of your actual cash position. Your cash flow will be greatly improved by regular reviews, and it’s a really good idea to set up a routine of weekly reporting initially, perhaps changing to monthly later on. We recommend monthly being the least frequent schedule to work with – quarterly reporting will just let you know how long ago things went wrong!
Good cash flow management is vital, and hopefully you can implement some or all of these tips in your business.