My Business – The Magazine for Business Owners, June 2010
Keep the cash flowing
Donna Stone outlines how to ensure that the cash flows do not turn into a trickle.
In my view, cash is not only king but the whole royal family! Cash is crucial to keeping any business running; your cash tightens up and you may as well have severed your carotid artery. So, here are some practical and down-to-earth tips for businesses to keep their cash flowing.
Invoice immediately or frequently: If you do larger projects, be sure to invoice in instalments (progress claims) but otherwise invoice immediately after the job, or at least weekly. You need to invoice to get paid.
Make it easier for a client to pay: Include your bank details on the invoice and have various options for payment, i.e direct, Bpay, Credit Card or cheque.
Collect on your debts every week: Have a system, a schedule and keep notes. When someone makes a promise but fails to fulfill, follow up as you should have noted all promises and when they were made. Remember the adage “the squeaky wheel gets the grease”. Squeak heaps and get those payments in quicker. It’s a statistical fact that the longer you let an account go unpaid, the greater likelihood of you not being paid – at all.
Know your margins and your cycles: And of course keep your bookkeeping up to date. A sale may mean income (in the books) but reality is that it’s when the client pays that’s critical. If your average collection days are say 70 and you are buying lots of stock, which has to be paid in 30 days, you are carrying a lot. Try to close the gap. If you and buy on credit, 30 days from end of month, buy early in the month, so you essentially get up to 60 days. Cut the debtors from 70 to 50 days and you’ll be ahead.
Keep stock purchases to a minimum: Don’t carry any more stock than necessary. Of course you have to have stock to keep the business going, but know what moves and what does not. For example, I am a MYOB Software re-seller. Some levels sell heaps and I stock these, but other levels (the very high levels) move slowly so I order these on a needs-only basis.
Get customers/clients to pay deposits on work: It’s quite common for high stock items (such as cabinet makers) to ask for a 30 per cent deposit.
Don’t release work till you are paid: Many service-orientated businesses (e.g accountants with clients tax returns) will not release work until they are paid, or at least the old account is settled.
Work on a pre-payment system: If you have a client who has a bad history of payment or looks to be going bankrupt, then definitely work on a pre-payment system. With a bad history, it’s very hard to ask for repayment in order to keep their doing work.
Consider “sacking” the “D” grade clients: If they are hard work, always unjustly complain and then don’t pay – you don’t want them. Honestly. Move them out to make room for a new “A” grade client.
Look after your “A” and “B” grade clients: These are great clients and you value them, so be sure to look after then and do not put so much emphasis on gaining new clients that neglect the old. Find at least one thing you can value add to these clients (perhaps a free report or additional free service) to show thanks for their custom.
Pre-payments from new clients: If you have a new client who has no history with you, again work on a pre-payment system for three to six months. Be polite and explain it’s standard Corporate Policy – most (especially those with good payment intentions) will understand.
Ask suppliers for early payment discounts: Although you know discounting isn’t good, it doesn’t mean you can’t ask your suppliers for discounts if you pay early. They may decide that having the payment early is worth giving out the discount.
Watch your expenses: Ensure you are not paying a fortune in phone services or bank fees, but don’t be silly about it. Remember you “need to spend money to make money”. Don’t cut costs on things like marketing and advertising as these costs are really investments in your business and critical to its good health.
Have a good accountant: This will help (legally) with tax liabilities and possibly reduce the need for instalment, and thus further free up your cash.
Ref: Stone, D, 2010, “Keep the cash flowing’, My Business – The Magazine for Business Owners”, June 2010 Edition, pp. 20.