Take control of your cash: 5 steps for avoiding crisis mode
Wednesday, February 17, 2016/
Cash flow is the main stumbling block for SMEs trying to secure funds for their growth.
With ongoing expenses and bills to cover to keep the doors open, poor cash flow strategies can negatively impact your customers, your staff and clients.
If you find yourself in crisis mode, Director of DFK Everalls, Melissa Healy, has identified some of the potential reasons your cash flow might be controlling you and suggests strategies to make your business thrive:
1. You’re unclear on the difference between cash and profit
Your profit is the difference between your income and expenses, while cash is simply how much money you have in the bank, says Healy.
As your expenses accumulate – from buying equipment to paying off loans – keep in mind you can still go broke even if you’re profitable because customers haven’t paid yet, says Healy.
Working capital is the cash you need to cope with these timing issues. To avoid problems, ensure you build up your working capital and have an Income and Expenditure Budget (showing how profitable you are) as well as a Cash Flow Budget (showing cash inflows and outflows each month).
“It’s also possible to have a business that is not profitable, but is still managing to trade… but this won’t be for long! In these cases, the business’ debts keep increasing until the creditors have had enough and the business is declared insolvent.”
2. You’re not closely monitoring your cash flow budget
The ‘cost’ of managing your cash flow properly is far less expensive than the cost of not doing so, says Healy.
Learn how to both create and use a cash flow budget, monitor your financial information on a monthly basis and analyse the information so you can quickly make any necessary changes.
3. You’re failing to manage your debtors
If you’re not being paid in a timely manner, there are a number of systems you can put in place before the job even starts to develop respectful relationships.
Before the job:
- Take the time to credit check new customers, as this saves you a lot of grief later.
- Have good engagement processes – provide accurate quotes that detail the terms including the due date for payment.
Maintain a good spread of customers so that if one defaults it doesn’t hurt too much.
- Get deposits or payments up front – especially for projects that have high upfront expenses.
During the job:
- Manage job turn-around times; the faster you do the job the faster they’ll pay!
- For service businesses that carry ‘work in progress’, issue progress invoices.
After the job:
- Don’t wait to send an invoice – instead of billing at the end of the month, bill as soon as the work or project is completed or when the stock leaves your business.
- Format your invoices properly with a specific due date for payment (rather than ‘in 14 days’).
- Make it easy to get paid 24/7 by offering BPAY, EFTPOS, credit card and website facilities.
4. Financing the purchase of equipment is impeded by a lack of cash flow
Are you facing cash flow difficulties due to buying equipment with cash? To best prepare, ensure you:
- Have finance ready before you need it. This prevents a lot of stress and will give you the time to negotiate a better deal with the bank rather than having to negotiate when you are desperate.
- Use secured finance to get lower interest rates.
- Get the right mix of secured and unsecured finance. Don’t use up your bricks and mortar security securing car/equipment loans if you are going to need it to secure a working capital loan.
- Match the finance term to asset life. For example, if you keep cars for only three years then only finance it for three years; if you buy a piece of equipment that will last you five years, then finance it over five years.
5. You’re misunderstanding short term versus long term cash requirements
Short term cash (working capital) is the money you need to cover the period between when you start doing the work and when you get paid for it. As your turnover increases, debtors and expenses will increase, which means you need more working capital.
Long term cash is money that you need to buy or set up a business, fund your medium to long term growth, fund asset/equipment purchases or fund ‘core debt’ (the overdraft that doesn’t go positive).
If you can prevent these cash flow problems in the first place, it’s an easy way to reduce stress and risk in your business.
To master key cash flow strategies for 2016, join DFK’s Live Webinar Workshop.
Written by: Thea Christie