A business with good systems in place will know when a cash crunch is coming and will be ready for it.
Unfortunately, most SMEs are not as well organised and, when a problem occurs, it tends to hit them right between the eyes.
The early warning signs that you are heading for a serious cash flow crisis include:
- Your creditors are getting pushy and some are threatening to sue
- Suppliers are refusing credit and insisting on either pre-payment or cash on delivery
- Your bank is becoming difficult
- You want to concentrate on building your business but are continually being drawn into cash flow issues
- Pay days tend to involve scrabbling around to get sufficient funds to pay the wages
Business owners should be focusing on building their business, not dealing with irritating cash flow problems, but putting your head in the sand could result in the failure of your business.
March, April and May tend to be the most difficult months for businesses, the delayed result of the Christmas slowdown.
If you find yourself in this situation, it is critical you do something about it quickly.
Here are some simple tips to get your cash flow back under control:
- Make a plan
Sort out the bills which are urgent, such as your phone and rent. Not paying those will have very immediate consequences so they have to be paid first.
Of the remaining bills, pick out those which are from difficult and demanding creditors and get on the phone to negotiate an instalment arrangement. You will find that most creditors will be reasonable, as long as you communicate with them honestly and openly and can assure them that their account will be paid.
- Ask for some help
The ATO will often be open to discussion, but you must be honest and transparent with them. GST and tax deducted from employees’ wages has to be paid but there is room to negotiate an arrangement for income tax or company tax.
If the situation still looks dire, call in an insolvency practitioner; an accountant who specialises in this area. It is far better to seek professional help early rather than waiting until it is too late. If the business situation looks grim, at least they will be able to offer advice on steps to take in order to protect your personal assets.
- Review accounts and expenses
Put a major focus on collecting your own outstanding accounts and refer any problematic accounts to a debt collection agency which offers a no recovery, no charge policy. This means you can recoup your money without worrying about being left out of pocket if the account can’t be recovered.
Also review the accounts which have been written-off from your books in the last four years and refer these to a debt collection agency as well. Anything which can be recovered will be a bonus.
For clients that owe you money, offer discounts for prompt payment. For example, your trading terms may require payment within 30 days but you could offer a five per cent discount if a client pays within seven days.
- Don’t try to do it alone
Involve your key staff in the problem and get them to work with you as a team to solve the cash crunch.
As I have said previously, cash flow is the lifeblood of your business, so it’s important to maintain it and control it.
Most businesses fail within their first five years of operation so implementing these simple steps will help make sure that you’re not one of them.
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About the Author:
Roger Mendelson is CEO of Prushka Fast Debt Recovery Pty Ltd and is a principal of Mendelsons Lawyers Pty Ltd. Prushka acts for in excess of 60,000 clients across Australia, providing insights into trends in business, economics and debt. Mendelson is also the author of The Ten Mistakes Businesses Make and How to Avoid Them and Business Survival, both of which were published by New Holland Publishers.
