Strong cashflow is a vital part of a business whether you are large or small. It ranks high in the reasons why an otherwise successful business fails. The simple definition of cashflow means “Do I have enough in the bank account to cover all the expenses?”
Unfortunately, this is an area that alot of business owners ignore because there is just not enough of their time to go around. Because debtors collection can be time consuming. And like like a plane that runs out of fuel, the business starts to make that downward spiral……
Retail type businesses have an advantage as most of their cash comes when the sale is made. However, for the other 90% of businesses, some action often needs to be taken to improve their cashflow if it is not working for them. So what can you do? Here are some basic tips:
- Document. Document. Document. If you sell a product, get purchase orders or an authorised email before you send your goods. If you are selling a service, consider using Terms & Conditions/Terms of Engagement, a quote or something similar signed by the customer which also clearly outlines the payment terms. If your customer is unwilling to put things in writing, it can often be a warning sign that they might not stick to their end of the bargain!
- Be strong about enforcing a consequence if a customer is not paying. You might want to add a clause about interest being charged, or let the customer know they won’t be getting anymore product or service until they make a payment. Often we just want to increase our sales, so we continue on with customers who don’t pay. However, consider the cost to your business in supplying a customer for free (your stock &/or your time) vs not making the sale in the first place.
- Consider offering a discount for customers who pay on or before time. Everyone loves to save money and this can be a good incentive. Many businesses with cashflow issues pay their suppliers who charge interest or offer discounts first. You may be able to the top of the payment run.
- If you have customers whose invoices are a regular amount, consider a direct debiting option like eDebit, ezidebit, ezypay or Paymenthub.
- Consider asking for prepayments or deposits for larger invoices. Or issue progress invoices rather than one large invoice at the end when the customer has less incentive to pay now they have already received your goods or services.
- Don’t just automatically hand out trade accounts to all customers. Consider offering a trade account after they have prepayed a few invoices first. And then get them to fill out a credit application with some trade references. And actually check these references! Most established businesses can give you a few suppliers who they regularly pay, however, if they can’t provide any at all, then this is another alarm bell…
- Sending regular statements, reminders and making phone calls can encourage customers to pay. Most companies tend to pay the suppliers first that are in regular contact about their invoices. Usually just to not have to deal with phone calls and reminders. Some customers only pay on statement, so make sure you are sending these out regularly at appropriate intervals. It can also help identify those invoices that never made it to the customer. And if you are using Xero, the XOCashflow add-on can automatically send email reminders to those customers who are overdue making the whole process even easier.
- Cashflow forecasting & budgeting, although somewhat time consuming for a business owner, can actually identify areas in your business that need improvement as well as helping you understand what new costs certain things, such as different cost of sales or suppliers, new assets or employees or even the costs of new services or products, can mean for your cashflow. You may also need to look at areas like how much cash you are taking from the business yourself or your gross profit margin (i.e. Sales less your Cost of Sales).
For many smaller business owners, focussing on cashflow and debtors collection can seem like a waste of time when they could be making sales, however, even though a business can be profitable and have high sales, if the actual cash is not coming in on a regular basis, then the amount of sales is not going to improve your business and in fact the lack of cash can cause you to start heading on that downward spiral.