In the end, all the forecasts and accounting programs in the world are no compensation for getting more cash in the door. Here are some tips on how to improve your business’s cash flow.
1. Set your credit terms carefully. The need to extend credit to customers is a fact of life for most businesses, but it is important to set clear limits. Carefully research the standard credit period for your industry and make an honest assessment about the consequences of shortening your credit terms. Reducing your payment period from 90 to 60 days might lose you one customer, but if the other 99 will pay more quickly it could be worth it.
2. Make your debtors pay quickly. It is vital to master the art of debtor management. One suggestion is to ensure debtors know how much time they have by sending payment notices on different coloured paper – with 30 days to go, send a blue notice, 15 days an orange notice and bright red when payment is required immediately. Talk constantly with major debtors as payment deadlines approach, and perhaps pass by; the squeaky wheel often gets the oil. A small discount for early payment can also provide an effective incentive to put that cheque in the mail.
3. Pay your creditors slowly. No one ever said business was fair. Take advantage of credit terms where you can and prioritise costs according to the severity of the consequences for not paying. Wages, taxes and direct debits are at the top of the list, key suppliers second and everyone else last.
4. Smooth out the lumps. Know when lean cash flow patches are coming and plan accordingly. It is invariably more difficult to get debtors to pay at BAS time and over Christmas, so make sure you have a bit of leeway in your cash accounts to pay wages and other inflexible expenses during these periods. Equally, avoid funding major purchases from your business’s working capital unless you are sure you have the cash to cover it.
5. Use finance products effectively. Overdrafts, premium funding, lease facilities and cash flow funding products can all be excellent tools to help match a business’s cash supply with planned outlays if used sensibly. Even the business credit card can be a good way to ease the squeeze as long as you are sure the debt can be paid before interest kicks in.
6. Do not incur penalties. The Australian Taxation Office and the Australian Securities & Investments Commission both impose penalties for late lodgements or payments in some circumstances. Paying these debts first will save you money and stress.
7. Keep your hands out of the till. Discipline yourself to make cash drawings only in line with conservative cash flow forecasts. Cash drawings are effectively just another expense for your business and should be treated accordingly.
By Peter Switzer, published on 5/03/2009
COMMENTS
PSwitzer1
20/03/09 11:11:26
Hi TotHazSol, Point 1: It's a fact of life that big business can mistreat small businesses. It's a reason why we have worked hard to have a diversified customer base so we are not dependent on one big customer. You might have to take on or extend your overdraft to ensure you don't have cash flow problems and try to price in the cost of that into your tender prices. However this can be easier said than done. If a big customer is killing your business, then get rid of that customer before it's too late. Point 5: Leasing can be a better way as it can be better for cashflow. Also have a look at commercial loan brokers who are becoming very popular. Some of the big mortgage brokers have diversified into commercial lending and are finding loans for business owners. These brokers only make money when they find loans for business customers. Try googling commercial loan brokers along with some of the big aggregator names like FAST, PLAN, CHOICE etc. Good luck!
Rocket
10/03/09 19:07:50
Thread has been removed as it is in breach of the forum terms & conditions ([url]http://www.bizthinktank.com.au/terms/[/url])
TotHazSol
05/03/09 20:08:52
In response to some of these points: Point 1) When you deal with big organisations, they set the payment terms. I've been told by multiple (yes-multiple!) supply departments, if I don't like the payment terms, then don't work for us! The sheer arrogance astounds me! In this economic downturn, the big corporations need to support the small businesses by loosening their payment terms. My average client is 60 days, end of month- how on earth do I keep up with that? Point 5) Very few banks and lending agents will support brand new start up businesses. We've been going about 16 months now and can't get a business loan, can't get invoice finance, etc. We're turning over 6 figures and with the exception of a car, we're toally debt free. However, we can't expand the business any further. (We now own all of our equiupment, etc) and are only juts starting to get a small amount of capital in our accounts). We thought we were doing the right thing by buying everything and not financing, etc, but apparatnly not.... :-(
cbadings1
05/03/09 09:09:44
Let me declare my hand upfront, I handle the PR for the Institute for Factors and Discounters (IFD). The IFD has witnesses a tremendous appetite from small to medium businesses to use their receivables finance for cash flow over the past five years. Around 6,000 SMEs utilised this form of cash flow funding last year alone to the tune of some $65 billion. All the major banks as well as specialist factoring and discounting businesses offer this form of finance. The interesting aspect of this is that increasingly businesses are using their receivables to fund not only much needed cash flow but also bigger ticket items such as acquisitions, management buyouts and the like.
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