What is it about cash?
There’s one thing for certain and anyone in business knows it. If you don’t understand the impact of a cash flow gap (the time between cash going out and cash coming in) you can turn a profitable job or project into a financial mess.
Nearly every business experiences this: the money flows out before it starts to flow in.
Make it easy
What most people don’t always know is how to find a solution to this pressing problem. One way to reduce the cash flow gap is give your customers easier ways to pay you on time.
Let’s get real here. If a customer’s only option is to write a cheque, address an envelope, find a stamp and post the letter – you’re really are putting a lot of obstacles in the way of getting the money you so badly want. Offer customers a range of payment options. These include BPAY, Credit Card and Postbillpay.
Electronic payment methods can streamline your banking. Giving your customers access to these payment methods means payments can credited directly to your bank account. In many cases these payments will be credited as cleared funds, which enhance your cash flow and removes the uncertainty of whether or not a cheque payment will be honoured.
What else can you do?
A sensible business does cash flow forecasts which make it easy to see when expenses occur and when income can be expected. This help to plan your need for cash.
The next thing to do is to keep updating your cash flow forecast to see whether you need to access additional cash – through sources such as a line of credit or a bank overdraft.
Why do cash gaps occur?
Well there are lots of reasons, but try these for starters:
o You buy stock before you sell any goods
o If you’re a manufacturer, you pay many of the costs of manufacturing a product before you can sell it
o If you’re just a one-man band, you still need pay the costs of your own labour (that is, pay yourself a wage) until you complete a job and get payment. If you have employees, then they won’t stay with you for long if you don’t have the money to pay them!
When you do your cash flow forecast include:
o Gas, electricity and phone
o Office consumables (such as stationery, photocopying and postage costs)
o Advertising and printing
o Tax office payments (BAS, GST etc, when they fall due)
o Credit card payments etc
Control the flow
Learning to control factors that affect your cash flow is the first step in reducing the potential cash shortage.
When developing a cash flow management strategy for your business, you need to take into account how your customers pay you. For example, are you paid in advance; when the sale occurs; or do you offer credit?
If you’re lucky enough to receive payment in advance, your cash flow gap should be minimal. However, if you regularly invoice for goods or services after you have provided them, you’ll have a greater cashflow gap.
The longer your customers take to pay you, the greater the impact on your cash flow.
Worst case scenario is that these debts that are taking too long to be paid turn into bad debts and become extremely hard to receive without employing a debt collection agency, this is why you need to stay on top of your debtors and keep your cash flowing making it easier to run your business and grow.
Author: Biz Think Tank
BizThinkTank is a dedicated small business website, with a wealth of regularly updated tips and articles. Whether you’re looking to start a business or grow your business, you’ll find a wealth of handy advice and information.