Seven ways to avoid cashflow woes
Monday, February 4, 2013/
The start of the year is traditionally a time many businesses struggle if Christmas trade has not gone as well as expected or if cash has dried up over the holiday period.
No matter how strong your profits or how large your turnover, cashflow can still bring a business down.
Andrew Baird, principal in business services at accounting firm WHK, says “cash is king” and without cash you don’t have a business, so maintaining a positive cashflow even in an environment where you might be incurring losses is critical.
Cashflow woes are a problem Baird frequently comes across in small and medium size businesses.
“Certainly small businesses might be run by a technician who is good at making something or someone who is good at selling, and cashflow can be easily misunderstood,” he says.
We’ve spoken to Baird along with a range of experts on how you can make sure your business stays out of trouble with cashflow:
1. Use a budget and check cashflow regularly
Don’t let lack of cash be a surprise to you, instead manage your cashflow by using a budget and reviewing your inflows and outflows of cash regularly.
“A common complaint is businesses making a profit but not having any cash, it needs to be put up front and managed on a regular basis at least monthly,” says Baird.
He recommends looking at cashflow forecasts every week and updating it as your sales and supplier invoices come through.
“Our clients that do it well, do it on a weekly basis and manage cashflow separately to profit and loss,” he says.
“In the current climate, trying to deal with the banks at the time you need the cash is not a good way to run your business. At the moment we are finding it can be two to three months to get facilities approved, if you have run out of cash don’t expect to get it quickly, so planning is really important.”
Lex Thornton, general manager of operations and sales strategy of local business banking for the Commonwealth Bank, recommends putting in place a realistic budget and then testing it against different scenarios.
“Think about what would happen if you lost a key customer – could you keep paying all the bills?” he says.
“That gives you sensitivity that if things change you have capacity to withstand that change.”
Thornton warns against taking your eye off cashflow and says a root cause of business failure is not having a daily or weekly look at cashflow.
“Businesses are really complex things and in the small business space it is up to owners or operators to stay close to it as well as juggling everything else like staff issues and customer issues, so it really becomes an issue of prioritisation,” he says.
“If you don’t have your eye on cashflow you are potentially not seeing a trend that may be damaging the long run.”
2. Keep an eye on stock levels
Ensuring you do not have too much stock on hand is a simple way to ensure cash is flowing, according to Baird.
“Over stocking is an easy one, a business might have made a profit of $200,000 but there is no money in the bank,” he says.
3. Set clear payment terms
To control cashflow you need to minimise the time it takes your customers to pay you by setting clear payment terms.
Thornton recommends offering inducements to encourage prompt payment.
“The key to drive effective cashflow management is a really solid budget and really understanding whether you can bring forward payments in any way. Can you offer reduced payment terms or cash on delivery? You may need to provide discounting to encourage that,” he says.
Baird agrees and says having money hidden in debtors is very common if businesses don’t have robust debtors’ provisions.
“You have to set up terms and conditions up front and remind about payment before due date, a lot of businesses don’t want to deal with it and don’t like asking for money,” he says.
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