Tactics to build your emergency fund and protect your business

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Saving cash for a rainy day is something many of us do as individuals, but in business that financial cushion often gets forgotten.

However, having the security of extra funds can go a long way. Not only will a rainy day fund see you through lean times, but it also builds confidence – having it there will empower you to take risks you wouldn’t otherwise.

Sophie Andrews, chief executive of The Accounts Studio, says having “rainy day” money is crucial – and not having it can be an impediment to growth.

“I think a lot of SMEs get in to that three-to-five year market, and they need cashflow to grow. But it’s either too late, or they’re doing something wrong and close the business down,” Andrews says.

Find out how Bankwest can help you set up an emergency fund for your business.

How can small businesses build their emergency fund?

Building up cash isn’t just about doing one or two big things. Andrews says businesses need to experiment with a vast array of methods to boost finances, such as:

  • Getting customers to pay on time
  • Adjusting for seasonality
  • Invoicing on time
  • Getting good payment terms
  • Chasing up debts
  • Being consistent with debtor chasing
  • Reviewing costs

One common misstep companies make is subscribing to services and neglecting to cancel them when they no longer need them, Andrews says. This can result in hundreds or even thousands of dollars being wasted.

When reviewing costs, Andrews says businesses should also be reviewing suppliers.

For many businesses, supplier contracts are about much more than business. Doing business with those same, dependable contracts is often worth the extra cost for the reliability. However, Andrews says if you’re not attached then it’s best to review your suppliers – but be reasonable, she warns.

“It’s not necessarily best to go for the cheapest,” she says.

Another way to save cash and boost that rainy day fund is to look at everyday structures that haven’t been analysed. Andrews points to staffing – have small businesses small businesses really done all they can to make their rosters more efficient?

“It’s about tweaking as many things as possible to get those costs down.”

What about utilising ‘temporary’ debt?

Having cash to draw on is good, but many businesses opt to use credit lines – such as credit cards and overdrafts – for a rainy day. Andrews isn’t against this – in fact, she says it can be a useful tool for businesses.

“I have a client who just got a major deal with a retailer,” Andrew says.

“So they have to fund a major product straight way.”

Incurring debt when they know orders will be coming in soon is simply a timing issue, and – if managed correctly – unlikely to have any long-term impacts.  

However, Andrews cautions businesses to be smart about utilising “rainy day debt” options.

“You just need to be able to pay it back,” she warns.

Staying on top of your cash flow

Apart from simply cutting costs, Andrews says businesses need to understand what their biggest profit drivers are.

While this is simply good business practice, Andrew says it will also help businesses focus on the jobs that can quickly add to that rainy day fund.

“A lot of businesses just go for any job without stopping to think about whether it’s making any impact on their profit.”

A final piece of advice

Andrews says companies often overestimate how much cash they need to survive. Creating a detailed cash-flow forecast and looking at where money goes can sometimes be reassuring.

“A lot of the time, it’s never as bad as businesses think.”

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How to make sure you’re paid on time

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One of the biggest challenges for small businesses is getting paid on time. In fact, almost half of Australian small businesses have more than $20,000 owed to them by late payers.

Late payments are on Australian Small Business and Family Enterprise Ombudsman Kate Carnell’s radar. She argues that big businesses and multinationals are delaying payments, using the tactic as a cheap form of finance.

“Large, billion-dollar multinational companies are extending their payment times to as long as four months — no small business can last that long,” Carnell said last year.

Imposing charges on these businesses can expedite the payment processes, but doing so takes deliberation, research and a strong will.

“You have to be extremely clear up front,” advises Sue Barrett, CEO of Barrett Consulting. Barrett recommends three key changes businesses can make to ensure their late payment terms actually result in getting paid.

Find the tools, guides and calculators to help you start, manage and grow your business with Bankwest.

Develop an iron-clad legal document

While developing a legal document is not something all businesses think about – or think they can afford – Barrett advises SMEs to sit down with a lawyer and develop a legal document that can serve as a contract template – including late payment penalties.

“Have clearly defined terms and conditions, and articulate that customers need to sign them before you start working with them,” says Barrett.

“It needs to be industry-specific. I’d recommend investing in a proper contract and don’t start any work until that prospect or client signs it.”

Far from seeming pushy, Barrett says this will give SMEs an air of confidence.

While some SMEs might be cautious about investing money in a lawyer, creating a template means those costs will be recouped fairly quickly.

Ask for money up front

Asking for late payment fees is only helped if businesses have a robust payment strategy in general, Barrett says.

She recommends asking for as much money up-front as possible – between 25-50% in the case of her own business.

“Based on the size of the contract,” Barrett says.

“You just need to be clear in your terms and conditions. It’s much easier to get goods back, but I can’t get my time back and so we have an upfront payment fee.”

And if they still refuse to pay? Barrett says late payment penalties don’t always have to be in the form of money – you can simply stop working.

“Just don’t deliver the rest,” she says.

“We had a payment due back in July that still wasn’t paid just before Christmas. There were a number of things we withheld from them.”

Eliminate your fear

It can be frightening to be forthright and demanding about money. But Barrett says you should get over any shyness you have – especially when it comes to the security and future of your business.

“Just remember that what you do is worth something,” she says.

“There are a whole lot of time-based businesses and consulting businesses that are getting ripped off.”

Nina Hendy, founder of the Freelance Collective, says many freelancers are now instituting late payments terms – and these are often very effective.

“A growing number of businesses are employing freelance creatives to undertake project work such as website design, copywriting, PR or marketing, and yet without a doubt, getting paid on time is one of the most difficult elements of running a freelance business,” she says.

“But growing numbers of freelancers are taking back control by penalising late payers by adding a clause to their contracts that explains to their clients that a penalty fee of 10-20% will be added to their invoices if they aren’t paid within the 30 days.”

“And reports are that it’s working well to keep clients on the straight and narrow.”

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Why paying early isn’t better than paying on time

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When business is going well, it can be tempting for business owners to get ahead of things.

Perhaps they might want to pay some staff early, or pay suppliers immediately after they’ve received a shipment. It seems to make perfect sense – like paying your own personal bills when they hit your inbox.

But according to accounting experts, paying bills early is just a poor use of money. But more importantly, it signifies a problem that many businesses have overall: getting clients and suppliers to agree to more flexible and beneficial payment terms.

“Rather than just paying your creditors in advance, this whole concept is wrapped up in the idea of better managing stock, creditors and debtors together,” says Michael Stapleton, founder of Pro Veritate – a financial consulting business.

Stapleton says while businesses with extra working capital may be tempted to pay suppliers early, it’s not usually a good use of money.

“If you pay your creditors faster, that increases the value of your working capital – you need more money to operate,” he says.

“Most businesses don’t have loads of cash.”

“I’m a big fan of small businesses negotiating the best terms they can from their suppliers, whether that be you can pay them in a month’s time or two months, and sticking to that agreement.”

Find out how Bankwest can help your business with managing your cashflow.

Stapleton says that negotiating payment terms depends on the business and each specific case.

“It’s just a commercial negotiation,” he says.

Stapleton suggests that if you’re going to buy from a supplier regularly and it’s of reasonably high value of ongoing purchases then you may have grounds for negotiation.

What are the underlying issues driving people to pay early?

When it comes to wanting to pay early, Stapleton says the most important aspect is the underlying psychology to the practice.

Stapleton points out that businesses eager to pay early are often afraid of running out of cash, or hitting trouble they can’t anticipate. While each may be a genuine concern, he says businesses need to create a system that enables cash to freely flow through the business – this means being stringent on debtors and stock.

Manage your stock effectively

“You don’t want to hold more stock than you need, so you need to have ways of knowing who owes you what money, when it’s paid, and making sure you have a process when you can expect to be paid,” he says.

“You also need to have another process where you know what stock is moving, and what isn’t moving – and know that so you’re not just buying stuff and adding to your stock.”

“The number of businesses I see where stock is the problem … it’s generally because they didn’t have a feel for what was moving or what wasn’t.”

Chase what’s owed to you

Stapleton says businesses need to be diligent about picking up the phone and contacting clients weeks or days before an invoice is due.

“I know clients who feel if they do that, they send a message they’re in financial distress,” he says. It’s actually the opposite, Stapleton argues – clients will believe you’re on top of your finances.

“You can also ring as part of your catch-up calls to see how they are, how business is, to keep in constant contact.”

By keeping stock under control, and by managing debtors, Stapleton says businesses won’t need to pay bills early. With agreeable payment terms in place, he says, businesses won’t need to pay any day other than the day payments are due.

“It’s better to set up an arrangement where you just pay when the agreement says it’s due.”

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