Breaking the cashflow drought

When business is booming, many entrepreneurs naturally turn their focus to sexier measurements like sales and profit, but when things slow down it is cashflow that is the key test of business health.



Don’t get caught out.


Here are 10 of the best expert tips for boosting business cashflow.


1. Put together a good cashflow forecast


A cash-flow forecast is a key diagnostic tool for the health of a business. Without one, getting your business’s cashflow right is almost possible.


Many businesses operating without a cash-flow forecast don’t even realise their margins are coming under pressure, according to CPA Australia policy adviser Jan Barned.


Small business owners in particular often shy away from putting together a forecast because they find it hard to gauge the affect different factors will have on cash-flow – events like the introduction of a new product line, marketing venture or extra staff member can have an uncertain impact.


But Barned makes the point that forecasting is a business skill like any other, with accuracy improving with practice and experience. The important thing is to just start doing it.


Here are Barned’s five tips for putting together a solid cash-flow forecast:

  1. Keep it simple: Piling everything into a cashflow won’t necessarily make it a better tool. Focus first on the items that affect your cashflow most heavily and add extras to the forecast if required.
  2. Standardise: Ensure procedures for collecting and reporting cash-flow data are consistent across all business units.
  3. Measure your accuracy: Set the level of variance from your cash-flow targets you are prepared to accept, and see how close you get each month. Where targets are missed, investigate the reasons and consider if changes are needed for next month’s forecast.
  4. Reward those who help: For all but the smallest businesses, putting together a cash-flow forecast requires significant input from staff. Make sure they know they will be rewarded for putting in the effort to provide accurate and timely data.
  5. Automate and integrate:If possible, set up business reporting and accounting systems so they provide automatic inputs into your cash-flow forecast.

2. Communicate from day one

Once you understand how cash moves through your business, you can start taking action to increase cash-flow.


In the current economic and credit climate, there is one key challenge most business owners are likely to face in bringing more cash in the door; getting customers to pay on time.


HLB Mann Judd Melbourne managing partner Geoff Webster is one of many cash-flow experts who cites constant communication as the crucial first step to improving debtor days.


Communication with clients has to start from day one, Webster says, with new clients receiving a notice clearly setting out how long they have to pay bills – and the consequences if they don’t.


Notices and invoices can also include a Romalpa clause; in effect, a legal clause that says the vendor retains ownership of goods sold until payment is received.


Once those parameters are set, smart businesses will build the client into a structured program of reminders and updates that ensures paying their bill remains at the front of their debtor’s mind.


On a standard 30 day payment period, Webster advises a letter or email reminder in the week leading up to the payment date. If payment isn’t received by seven days after the deadline, a phone call should then be made to the client, and then another every week following until payment.


“It really is a case of the squeaky wheel getting the oil,” Webster says. “Your clients need to know that you are following them and that you won’t go away until you are paid. And don’t bother sending polite little notes with crocodile stamps – personal phone calls always work better.”


The best way of getting a bill paid, Webster says, is often a direct phone call, business-owner to business-owner. “Anything to personalise your approach and help your business stand out from the others clamouring for payment helps.”


3. Check the credentials of new customers

New customers are great, but new customers that actually pay are even better. The problem is, it can be difficult to tell one from the other until it is too late.


One measure that can help you avoid the duds is a standard credit check for any new client that will be offered credit.


Industry practices vary, but according to Bruce Growcott, a senior partner with PKF Enterprise Advisers, at the very least potential debtors should be asked to provide a couple of trade references.


“References can be helpful just to determine whether a client is a tyre-kicker and will often tell you a bit about the credibility of the individual – as long as you actually check them,” Growcott says.


Beyond trade references, additional security in relation to new customers can be sought by asking for a bank reference or even a director’s guarantee, although most businesses will be reluctant to give them.


New customers could also be asked for permission to have an external credit check run on them – credit agencies such as Dun & Bradstreet will carry out checks that a provide a range of information, including a company’s legal structure and credit worthiness.


4. Give your customers a reason to pay

Reminders and checks may get the debtors paying in good times, but when things are tight a little something more will often be necessary to bring in the cash.


A tool many cash-flow advisers believe is effective, if costly, is the discount for early payment.


There are many different ways an early payment discount can work. Discounts can be scaled, so the earlier the repayment the bigger the discount, or further discounted over time for selected customers as a reward for prompt payment.


Business advisers disagree on how discounts should be managed. Some argue that clients shouldn’t be offered a discount upfront – why provide a discount if they will pay on time anyway – but others, such as Pitcher Partner’s partner David Young, say it is best to be open from the start.


“Clients should be told about discounts upfront. People often don’t take up discounts even when they know about them, so if you are having trouble it is worth going back and explaining to them what they could be saving if they pay on time. That will often get their attention,” Young says.


Even if you are having trouble getting clients to pay, do your research before offering a discount. Calculate what the credit extended to customers costs your business in interest or lost opportunities, and compare that to the margin a discount will knock off your debtors book.


If a discount doesn’t make financial sense, consider offering other benefits for prompt payment such as a higher level of post-purchase service or priority access to new stock.


You can also make paying your bills less painful for your clients by allowing them to pay in instalments, helping them smooth out their cash-flow and giving you some increased security.


5. Spend more time ensuring your big clients pay

Small businesses that rely heavily on dealing with a few, big clients, often find themselves in a bind when it comes to cash-flow – desperate to be paid, but petrified of losing a key customer.


Managing big clients requires a careful approach, with plenty of care and attention backed by a firm commitment to being paid.

The “good cop” part of the process requires constant monitoring of a big client’s repayment rates, and quick action if there is any deterioration in the time bills take to get paid.


But if debts blow out, big and small clients alike must know that you will take whatever action is necessary to get paid, PKF’s Growcott says.


“Small businesses often allow themselves to be at the end of the food chain because they afraid of losing a client, but in the end your business is put at risk anyway,” Growcott says. “You have to have conviction that your product is the best, your client wants to do business with you, and they will meet your payment terms to get it.”


A useful back-up for small businesses heavily reliant on a few big customers, especially given the increasing risk of customer insolvency, is debtor insurance.


“Look at your book and think about how important your bigger debtors are to your business. If there is one or two that would knock your business over if they didn’t pay, it may be worth controlling that by insuring their payment,” Growcott says.


6. Encourage staff to bring in the cash

Many businesses reward staff for boosting sales. During a downturn, cash-flow management is arguably more important, so why not give staff a real incentive to help make it happen?


This can mean introducing a performance-based component for accounts receivable staff, but often improving cash-flow requires an organisation-wide effort.


The CPA’s Barned says it can often be worthwhile to direct at least a portion of your sales team’s commission structure towards ensuring the customers they sell to actually pay.


“Small businesses with sales reps often pay commission on the amount of sales, so by swinging it around and paying a commission on sales banked you may find that all of a sudden your sales team is in there helping you collect that money,” Barned says.


Staff should also be encouraged to participate in cash-flow management by keeping accurate and up-to-date cash-flow data and ensuring it is fed into the business’s cash management system.


And if you are a one-person business, the task of ringing the debtors can be made a little easier by swapping debtor lists with a fellow sole operator, Barned says. They chase down your debts, you chase down theirs.


“Small business owners often find it difficult to go from marketing to customers to being the bad guy chasing payment,” Barned says. “Swapping with another business owner can make it easier, and the client doesn’t need to know.”


7. Debtor finance can help in a tight spot

There are a range of finance options available to small businesses that can provide an immediate boost to cash-flow – at a price.


Whether called debtor factoring, invoice discounting or debtor finance, these facilities effectively allow a business to borrow against the value of their debtor book.


Tony Adhore, southern business development manager with debtor finance firm Bibby Financial Services, says while his average client has about $2 million turnover, companies ranging in size from $400,000 revenue per year to larger public companies can find it a useful tool.


A debtor finance firm will come in and assess your debtor book before determining the level of finance provided, with debt facilities worth up to 90% of the book available.


An important issue to consider is whether you will retain responsibility for following up debtors for payment. Generally the smaller the client, the more likely it is the debtor financer will want to take control of the collection function, Adhore says.

A director’s guarantee to ensure payment of the debts will also be necessary sometimes.


Businesses in sectors with very long payment terms such as manufacturing, clothing, wholesale and printing are used to using debtor finance.


While debtor financing isn’t cheap – as well as interest, debtor financers will usually also charge a regular service fee – it is becoming increasingly common as mainstream borrowing options become harder to get and more expensive, Pitcher Partners’ David Young says.


“Debtor finance is a legitimate option and getting more common,” Young says. “I will generally advice clients to use an overdraft first, but for those with a decent book and a cash shortage it can work.”


8. Be disciplined

If sweet-talking, phone calls, or discounts don’t get your debtors to start paying, they need to know that you won’t be afraid to bring the in big guns.


The first big penalty you can level against a delinquent customer is to refuse them any further credit and require them to provide cash on delivery. This might not get your debt paid, but at least it will prevent any further leakage.


The next step up is to cancel supply. This step can have serious ramifications for your relationship with the client, and of course for your own business, but it sends a clear signal that you are serious about your debts being paid – and that no one client is so important that they don’t have to pay.


The end of the line with a debtor is to bring in the lawyers. According to Christine Christian, chief executive of credit assessment, management and collection firm Dun & Bradstreet, legal action is worth considering for any debt above about $200.


And, Christian says, legal action doesn’t necessarily need to be the end of the line for a client relationship.


“We take the view that today’s debtor is tomorrow’s customer. It really just comes down to maintaining a professional relationship, being clear about what your standards are and the consequences for breaching them, and following through with that,” Christian says.


9. If you can’t be disciplined, outsource to someone who can

Business owners are notoriously time poor. Many just can’t devote enough time to debtor management, or regret the sacrifice required to other parts of the business if they do.


For businesses that want to beef up their debtor management, but don’t want to build an inhouse accounts receivable capacity, outsourcing can be an option.


Dun & Bradstreet is one of several firms that will provide businesses with the full range of debtor management services, from credit checks to phone calls and legal debt enforcement.


The key test of whether outsourcing will work for a business is how it fits into the bottom line, with the cost of the service balanced against the prospect of improved payment rates and the convenience of somebody else managing your debts.

Dun & Bradstreet’s Christian says her firm is generally able to provide tailored options for businesses that see their debtor management costs reduced by about one third.


HLB Mann Judd’s Webster says outsourcing usually makes most sense for businesses with a large number of low value debtors that can be processed most efficiently by automated systems.


But, he says, outsourcing firms can’t always provide the same level of client service that yourself or your staff can provide.

“The people you outsource to don’t know your business as well as your staff do. If a client has a problem with an invoice or says they didn’t receive a notice, then they will have to come back to you and check, then go back to the client, and that can be cumbersome,” Webster says. “For that reason I generally think outsourcing is most useful at the sharper end of things.”


10. Don’t grow yourself out of business

Cash-flow management may become imperative during economic downtimes, but periods of rapid growth can present equally difficult cash-flow challenges.


“We see as many businesses go broke (through) expanding as contracting, because they don’t understand how to balance growth with things like capital investment as their company grows,” Young says.


Careful cash-flow forecasting can help businesses avoid growth pains by highlighting the need for increased capital expenditure and the imbalance to cash-flow that comes from an increased debtor book.


Talking to your bank can help you get through the cash-flow squeeze that often precedes a profit boost, Young says.


“If you see a period of growth on the horizon, you need to talk to your bank now about what is going to happen and what you need. There is nothing less likely to be successful than going to your banker and telling them you need an immediate overdraft increase, whether it’s because your business is growing or slowing down.”


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