This is an old post from the old blog site. I felt it important enough to repost here as I will be disabling the old one.
Many small businesses fail because of poor cash flow. Cash flow is the process between your incoming and outgoing cash. For small businesses and start-ups it’s a constant juggling act to ensure that you have enough money coming in to meet your obligations. When outgoing cash is more than the incoming, this is where many businesses start to crumble.
Planning your cash flow is integral to running a business. It allows you to plan how much cash you require in order to operate and grow as well as highlighting times where you may need to tighten the belt a little.
The GST and cash
The introduction of the GST has had a big impact on the cash flow of many businesses. One of these issues is that tax payments are all paid at the same time when the BAS is due. If a business does not have strict procedures set up to separate the GST collected from their income or tax withheld from their employee’s pays as they come up, it’s always a mad scramble a couple of days before the BAS is due to get the funds together. For many, it results in an overdraft on their bank accounts.
We can all fall under the bad habit of spending the GST collected from customers in expectation that we can cover the amount in the next billing cycle, or when that big project comes through (I’ve done this a few times myself). What if that big project doesn’t come through? Or your billing the next month is lower than expected? As the old proverb says “A bird in the hand is worth two in the bush”. Put the cash aside while you have it.
Manage your debtors
We all have customers who are slow to pay bills and it’s important to manage them and bring them up to date. Remember: the contract between service provider/seller and the buyer isn’t complete until the money hits your bank account.
Write down a policy about your sales, payment and credit terms. Include procedures on how often to send statements to customers and steps on following up outstanding amounts. If your terms are 14 days from date of invoice and it’s been 30, what do you do? Will you send an email reminding them? How about when it exceeds 45? More importantly, document what you would do when the invoices remain outstanding after your follow ups. Are you going to stop supplying to them? Stop your service? Put your foot down. If you are scared of losing the business, think about this: is there really a business if they’re the only ones benefiting? From my point of view, they’re getting a freebie while you’re losing money.
Be prepared to turn down an opportunity if there is a risk that you won’t get paid on time. You’d be better off devoting your time to finding another one where you will.
Some tips on managing your cash flow
• Set up a cash flow plan at least 3 months in advance and review it on a regular basis.
• Set up a high interest savings account and deposit the GST collected on sales in that account as you receive it. This way, you not only have the money available to pay the GST liability when it fall due, it’s also earning interest for you at the same time.
• Set up a strict credit policy, communicate it to all clients/customers and stick to it.
• Invoice on time and make sure that the customer receives it. Send a copy to their accounts department if you know who they are.
• Review your debtors regularly.
• Offer discounts for early payments.
• Investigate if setting up a direct debit option is viable. Then offer a discount to customers who take up the offer. This guarantees a regular inflow of cash.
• Consider putting slow payers on COD terms.