There is an old adage saying “cash is king” and that cashflow is the blood that keeps business pumping. Cashflow is probably the most critical component of success for a small or medium-sized business.
There is often a mix of different factors responsible for poor cashflow, internally and externally, and at times, a lack of experience within company management, but not always.
“One of my clients is dealing in the aluminium and steel industry. The new carbon tax is forcing him to significantly update his equipment, which is costing a lot of money – money he doesn’t have – which will have a serious impact on his cashflow,” says Cheree Woolcock, accountant and business advisor at DFK Australia New Zealand.
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“There was no way he could have predicted that and the impact on his cashflow.”
Taxes are one example of a cashflow factor which cannot be predicted. There are, however, others that you can see coming:
- Customers making late payments
- Payment conditions changes, for customers and suppliers
- Expanding too fast (money runs out)
- Many payments are due at the same time
- Increased costs (rent, fuel, electricity and staff)
- Buying equipment you do not need
- Holding excess stock (wrong prediction about sold quantity)
- Seasonal trends changes, you have stock in the wrong time (Christmas trees in Easter)
- The economy in general and exchange rates if you are trading internationally
All of these factors will have an impact on your cashflow. If a client starts to pay you weeks later than normal, it might be a warning. Let him know that you have noticed and ask for an explanation and work with them to get it back on track.
“Things are changing: 30 days payment conditions are becoming 14 days and sometimes COD (Cash on Delivery).”
Cashflow is affected by everything you do in your business. So you have several opportunities to set up different strategies, systems and routines.
“Every business needs to have a cashflow budget. If you’re business is doing fine – once a month is enough. But if your business is struggling, weekly and sometimes daily is necessary.”
Be honest! The more often you look at your figures, the better it is. Predict the future cashflow and compare with the actual result. The difference in between them will make you understand what is happening in your business.
“Don’t put your head in the sand. Unfortunately, several businesses don’t want to admit how bad the situation is. They are avoiding it, which usually makes the problem grow bigger,” explains Woolcock.
What can you do to improve your cashflow?
1. Change the payment conditions for your customers, if possible.
2. Communicate to suppliers and clients. Ensure your staff follow a system rigidly. Equally, your reputation is on the line when it comes to paying suppliers.
3. Borrow money, but as you know, this comes at a cost whether it is from the bank, debt factoring or other sources.
4. Sell more! Not easily done, but maybe have a sale? Different deals. No matter how tough things get, you cannot stop marketing and promoting your business.
5. Reduce your costs, better deals. Sell your premises and rent instead. Pay bills on time to avoid fees.
“Above all, talk with your accountant. We are here to help. For clients who have been with us for a long time and who are in temporary difficulties, we can look at holding off our fees until the storm has subsided,” Woolcock says.
6. Perform checks on your new customers. Are they good payers? No! Why do you think they would treat you any better?
7. Make sure you deliver on time – if not, you will not be paid on time – simple.
Sometimes all of these actions may not help. Your business may simply be insolvent – beyond rescuing. Winding up a business is not easy. “It’s so difficult for business owners to close down their business. It is such an emotional decision to make. Often they hold on too long,” says Woolcock.
This article first appeared on StartupSmart.