Protect your business from cashflow killers

Cashflow is one of the most common killers for both newer and more established businesses – it doesn’t matter how good your product or service is, if you don’t get paid on time then your business is doomed to fail.

Managing your cash intake is one of the most common tips given by accountants and business advisors, but too many SMEs can fall prey to focusing on other issues. However, according to ASIC, with 41% of failed businesses attributing their downfall to cashflow issues, SMEs can’t afford not to pay attention.

So…what can you do?

This is a crucial question to ask, not just now but regularly. Michael Prior, head of PB Advisory Group, says larger businesses have started extending out their payment terms to 90 days – such a change can have a profound impact on SMEs, and it is one that you would only know if you regularly reviewed trends in cashflow management.

“You really have to start thinking about whether it’s worthwhile doing business with those companies,” Prior says. “The other side of that coin is that small businesses should make sure that they don’t have one or two key clients having the majority of their income from a cashflow perspective.”

There are some typical things businesses can do to make sure they get paid on time: choose your suppliers well, and plan your sales accordingly. But there are plenty more strategies SMEs can follow to make cashflow problems a thing of the past:

Don’t mix personal and business funds

While this seems like a straightforward example, Prior says he has witnessed too many business owners thinking they can tide things over by mixing their accounts.

“It’s where they get tripped up,” he says. “Then when the time comes to pay invoices, they don’t have the cash.”

Chase invoices up immediately

Small businesses often let invoices go late for a few reasons, mostly because they’re either too focused on other activities or they’re afraid chasing up payment will make them look pushy. Don’t fall into that trap, says Prior.

“Often a customer has just forgotten about it, they’ll pay it, but if you push it out and push it out, people get embarrassed about asking for it.”

Take deposits and don’t hand over unpaid work

Prior recommends taking deposits for new customers, and then figure out another arrangement if there’s going to be some sort of regular payment. The main reason for this is so that customers are less likely to not pay you for work overall.

Want to go even further? Prior says don’t hand over work if it hasn’t been paid for.

“Withhold the goods. You don’t tell your mechanic you’ll pay in a week’s time, so you should withhold the goods until they have some cash.”

Take out trade credit insurance

Protecting your business against incidents like businesses defaulting or going bankrupt can be a good way to shore up your cashflow. Australians and Australian businesses are in general underinsured, so do the work now – this is particularly important if you’re heavily weighted towards a particular customer or have a key dependence on a supplier.

What is trade credit insurance?

Rather than viewing insurance as merely a debt collection resource, trade credit insurance can proactively protect you from finding yourself in a position where you need to chase payment in the first place. For example, a professional adviser in this area can conduct profiling and risk assessments of your customers’ and suppliers’ financial robustness based on their industry, location, history and trends in the market to ensure you are doing business with reliable contacts.

Create products or services with regular payments

Just as the software industry has transitioned to overwhelmingly using subscription-based products, Prior recommends businesses try and figure out ways to split up their payments over time.

“Those businesses’ models that can develop a recurring revenue stream can become valuable as well,” he says.

Although, he says, there is one final strategy businesses can try…

“Of course, you can always put a note at the bottom of an invoice: if it isn’t paid within so many days, you’ll charge interest,” he says.

“That often works.”


Coface has more than 70 years' experience in global trade. With data on over 80 million businesses worldwide, we make more than 10,000 risk decisions every single day. For unparalleled expertise in trade credit risk, partner with Coface for the complete view of your customers.

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