Cashflow is King
Cash is King! We’ve all heard this before, but most small-medium business owners know that cash flow is their most important metric. Unfortunately, poor cash flow is also the number one reason why SME’s go into liquidation.
A business can go a long time without being profitable. However, a highly profitable company with poor cash flow cannot last very long.
Maintaining healthy cash flow in your business is critical. Like so many other aspects of business, it requires planning, review and (in time) improvement.
Cash Flow either restores or enhances the ability of your business to make funds available for operational needs, and growth.
One of the best pieces of advice I was ever given is: Look after the cash, your staff and your customers, in that order, is the key to a successful long term business.
I’ve outlined what I think are the 8 most important principles to
1. IN & OUT
- Identify the inflows
- Determine ways inflows can be maximised, eg. Upselling, bundling, etc.
- Identify problematic cash inflow factors & determine ways to reverse their effects.
- Identify the outflows
- Rank outflows by urgency
- Prepare cash outflow projections (at least 6 months worth)
- Determine how outflows can be minimised, eg. carry out a full audit of spending to determine lower cost alternatives
It’s often said that the key to successful cash flow management and survival in difficult times, is to know where your business can cut costs.
2. Don’t be a pushover with your customers
The easiest way to maintain good cash flow is to get paid on time.
- Be direct and clear. Be fair, but don’t be a pushover
- Make regular phone calls once invoice date has passed
- Create a clever-polite invoice reminder strategy. There are some light hearted templates you can use
- Don’t be afraid to take formal action if required. Bad payers often rely on inaction. In most cases debt collection providers will not charge anything unless they retrieve the outstanding amount. And don’t forget, the statute of limitation on such debt is 6 years.
- Don’t hold off. As receivables age, it’s less likely that you will see your money.
“Rule number one: never lose money. Rule number two: don’t forget rule number one.”Warren Buffett, CEO of Berkshire Hathaway
3. Inevitability of Taxes
This is not an outflow that your business can afford to ignore. Unlike other creditors, the ATO will never go away. For businesses that do not adequately account for their company profit tax, GST and superannuation obligations, it can potentially become a hole which is very difficult to climb out of.
- Keep a separate tax account, that you or your bookkeeper regularly transfer into
- Keep a separate GST account that you or your bookkeeper regularly transfer into
- For the above, some business owners find it easier to open an online account with a different institution. This may sound silly. However, it’s a greater degree of separation. If you’re always on your regular online banking page, it’s easy to drain the GST account in times of need, if the funds are staring at you.
- Maintaining your employee superannuation payments is a non-negotiable.
- Always maintain communication with the ATO. If you’re having difficulty paying your tax obligations on time, they much prefer to hear from you, than no response. They’re also much more lenient with interest charges if you’re in regular dialogue and explain your circumstances.
4. Keep your books in line
Having an efficient and easy to use accounting system is critical to keeping on top of cash flow. However it also needs to be maintained and updated regularly.
- Books must be accurate
- Books must be kept up to date
- Your accounts must be reconciled regularly
- Your system must be easy for you to use, so that you can view your financial position daily
5. Get your invoicing right
- Send invoices immediately
- Make sure the right person is receiving them
- Invoices must be clear – with clear terms
- Schedule your accounting system to e-mail invoice reminders once they are 7 days overdue – as mentioned earlier, these can be customized to be light hearted.
- WIP – invoicing for work in progress is a forgotten element of cash flow. Invoice for progress payments on large projects – labour, materials, subcontractors. WIP should also be placed on the balance sheet.
6.Monitor your accounts receivable turns
Regularly viewing this important number will instantly help to keep on top of debtors.
Annual sales (done on credit=sales)
_____________________________ = Accounts receivables turns
Accounts Receivable oustanding
_________________ = 5
If the number is trending down, you need to put more focus on bringing in money owed.
7. Don’t mix business and personal finance
This is essential if you want to understand your business cash flow. If there’s no separation between the two, you will never truly know how your business is performing.
- At tax time, it makes reconciling everything far more difficult. Which will most likely add to your Accountant’s bill.
- When all funds are going into and coming out of the same account – it can lead you to missing potential tax deductions.
- When all funds are mixed together, it can be almost impossible to borrow from the banks. They love to see clear division.
- It’s been proven that entrepreneurs who have comingled finances tend to see their business as more of a hobby, than a professional business concern. This may sound strange, but those who actively maintain separate accounts for their business dealings view their businesses far more professionally, and will generally make more educated business decisions.
It’s easy to open a separate business account with a credit card. Don’t forget to put a sticker on it to denote ‘Work’, so you don’t confuse the two – as they’re often from the same bank and have the same look.
8. Have a cash reserve account
Understandably, this can be difficult for many business owners. However, I would encourage you to start small.
- It provides the cushion you need to deal with unexpected events
- Gives you the confidence to take action on opportunities when they arise
- Opens up options to grow your business
It might be as little as a $1000; which should be kept in a separate account-ideally with a separate institution. You can then set a goal amount by the end of 2020- which may be $5,000 or $50,000, depending on your business type/size.
Watching cash flow, handling debtors (and creditors) and not taking excessive drawings as the business owner, are some of the keys to longevity. You need to continually remind yourself that not all the money left over in your business after paying expenses is yours.
Have a great business – you deserve it!