As a business owner, one of the biggest responsibilities to deal with every day for business survival is cashflow. In a recent poll by the Small Business Development Corporation of Western Australia, 39 percent of businesses named cashflow management as their sixth biggest challenge as a business operator.
The Australian Securities & Investments Commission (ASIC) statistics tell us that on average 18,000 businesses each year enter into external administration or insolvency – with 60 percent of small businesses failing in the first three years of operation. In many instances, these failures are due to a lack of understanding of the importance of cashflow.
Cashflow is the lifeblood of every business, large or small, and a crucial component to track, manage and be fully across. No excuses, particularly in this climate when cash is hard to come by from banks and institutions post GFC.
The fundamental gap between when you invoice and when you get paid is the make or break of many businesses. And the cash you have stored for working capital or for slow months is a crucial habit and not a management function to leave to chance. The management of paying bills, taxes and other statutory payments such as PAYG (pay as you go) is a juggling act, so it pays to get right.
Expenses are a part of life, and good management of cashflow will enable you to manage the direction of your business rather than it managing you. It bodes well for a sense of peace and control. You may be trading profitably in the sense that you are “making a profit”, but unless your cashflow is under control, you are operating at risk.
Today’s economic conditions make cashflow planning even more critical to the survival, growth and profitability of business so appropriate “forward cashflow planning” is a good discipline. With little or no planning you could be forced to borrow additional funds or even have to sell up to cover debts.
Good money management
So if you want business stability, make good money management your thing. Being efficient and disciplined will put you in a freer position to jump on opportunities. Having this kind of flexibility is liberating to facilitate you making critical business decisions (eg. around investments, expansions and new service or product offerings).
There is a big difference between a liquid business and one making sales. As you well know, there can be a considerable amount of time between invoicing and the time you get to be paid from customers for the products or services you sell – known as the payment cycle. That time lag can wreak havoc on cash flow and your ability to pay your bills on time.
Unless you provide a service where you get paid in full ahead of time, or you earn regular retainers where your clients pay you at regular intervals, it is this payment cycle that you need to control. As a small business owner, you want to do more than just keep afloat and there are ways to minimise cashflow problems.
So how can your business successfully manage money better to avoid cashflow traps?
Understand basic finance principles
I think it’s important you are armed daily with the appropriate information at your fingertips, particularly the movement of cash in and out of your business. Cashflow is the one most essential component to monitor. Ensure your book keeper provides you with, or you maintain these critical documents, that should be delivered to you on a set day every month.
Have these documents delivered to you every month:
- Balance Sheet (the overall health of your business)
- Profit and Loss statements (the monthly snapshot of your business health).
Have these documents delivered to you every week:
- Accounts Receivable and Payables reports so you know who owes you money and what bills you need to pay
- A cashflow forecast on an Excel spreadsheet (where you track incomings and outgoings against the date they occur so at any time you can see the bottom line figure – is it red or black?)
- Know your expenses by ensuring staff fill out purchase orders before expenses are incurred.
This regular monitoring will save you any nasty surprises.
Perfect those payments
The golden rule for good cashflow management is to invoice more frequently, rather than doing what so many small businesses do and leave it to the end of the month. Consider this: if you have $40,000 a week coming in and you leave it for two weeks, that’s $80,000 less to work with.
Depending on the relationship with customers, the strength of the business and the particular job, it might pay to collect a good amount up front before the job begins. Some businesses, for example, might settle for 40 percent up front and the rest of the payment on the work when it is completed. Another option is to include triage payments or retainers as we call them, into your business. This is effective for cashflow because a continual staggering of payments is made through various agreed payment points such as fortnightly, monthly or bi-monthly.
Watch expenses and cut the shrinkage
We call wasted money “shrinkage” at Taurus. Monitor where unnecessary expenses are being incurred and check your procurement process. Print on double-sided paper, order effective printers, check stationery orders and watch where operations can cut costs. If you discover there are parts of your business that are not performing up to the levels you would like , consider outsourcing.
As my business is an integrated PR and marketing agency, I use specialists for specialist tasks and reach outside the expertise of my full-time staff to find subject matter experts and contractors. This outsourcing of specialist time is both time and cash effective.
Forecasting for future success
While basic cashflow rules may seem tiresome, effective forecasting will also prevent larger issues from arising unexpectedly. A good forecast model anticipates problems so you can take action to avoid them. It can develop assumptions on sales, costs, credit and funding to produce monthly cashflow projections well ahead and assess the impact of cashflow on future sales, costs and credit terms.
–Sharon Williams is founder and CEO of Taurus Marketing.