Running your own business brings with it a unique set of challenges, especially once you grow from sole trader to employer. The biggest of these challenges is managing cashflow. A 2016 survey by East & Partners found that more than six out of 10 Australians regularly or occasionally draw upon personal finances, like a personal credit card, to support their business—a practice that does not equate to long-term success.
What these findings suggest is that the survival of many small businesses depends solely on the ability to manage cashflow. And it’s not just about understanding profit margins.
Here are six tips to get back on track.
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1. Forecast, forecast, forecast
As a business owner, it is important to understand how much cash your business needs to run day-to-day. Outgoings such as rent, bills and staff wages need to be compared to the revenue your business is bringing in. Once you know your budget, you can start to measure results and forecast what you need to stay afloat. Begin by setting cashflow targets and update weekly to get a more accurate outlook for the next six to 12 months.
2. Set clear payment terms
If you don’t know when something is overdue, how can you manage cashflow? Know your payment terms and invoice as soon as work is completed. Small businesses should push to get payment within 30 days of invoicing but negotiate the longest possible terms for accounts payable.
Automating the process as much as possible with accounting software can help ease the burden. If possible, consider direct debit payments for your customers to minimise the gap between invoicing and payment.
3. Make it easy for people to pay you
Firstly, ensure you have a business bank account. It’s best practice to keep your business and personal finances separate. From here, make sure you have the proper infrastructure in place so that customers can pay you via a variety of secure options, including online payments, bank transfers and credit cards.
4. Offer retainer packages
Particularly for service-based businesses, offering your clients an up-front paid retainer each month may be beneficial for your cashflow. Retainers offer the client a slightly discounted rate, but getting paid up front rather than in arrears allows you to better forecast your cashflow. And it gives peace of mind.
5. Get help to monitor your cashflow
Train an office manager or employee to keep a close eye on daily credits and debits to make sure there is sufficient cash on hand. If you have regular substantial outgoings and an unpredictable income stream, it is crucial to have someone dedicated to keeping on top of things.
6. Keep finding new business
Don’t expect that your customers this month will be your customers next month. Business owners of all sizes must consistently build a pipeline of new business and new work for the coming months. If you rest on your laurels of attaining new business, you might be hit with a trough when one of your biggest accounts goes elsewhere.
Cashflow is a stress factor for many Australian business owners. It’s part of the reason why many opt to forego a wage. By following the steps above, you can start making sure you cut down on the stress and set your business up for continued success.