Profitology

Category: Cash Flow

  • Is poor Cashflow keeping you awake at night? Follow these 6 tips for a better night’s sleep

    Is poor Cashflow keeping you awake at night? Follow these 6 tips for a better night’s sleep

    Regardless of what stage of business you are in, cash flow, or the lack thereof will impact on your ability to operate your business.

    In my experience, poor cashflow creates pressure and stress for a business owner. Their focus and time is drawn away from the core operations of their business as they worry how wages will be paid, suppliers will be kept happy, and other creditors obligations are met.

    Further, poor cash flow makes it difficult for business owners to take advantage of opportunities such as new product lines, new technology or other equipment for the business.

    Simple aspects such as taking advantage of supplier discounts may also be a lost opportunity.

    If poor cash flow is hindering your business, you may benefit from one (or more) of the following tips:

    1. Ensure your terms of trade are documents and clearly communicated to your customers. More importantly, implement a process for following up debtors when they fall overdue.  Remember, the squeaky wheel is the one which gets dealt with first.
      Offering for the debt to be paid by instalments, and receiving a first instalment prevents your debtors from being able to argue with the invoice amount at a later stage. If your debtors are slow in paying or avoiding your efforts to make contact, consider engaging formal debt collection. Despite common belief, initial debt collection processes are often a cost effective means of recovering debt.
    2. Progress billing is an option that is often overlooked. Are you able to request a deposit upfront, followed by progress claims as you complete certain milestones of the assignment? To ensure you benefit fully from this process, ensure the progress invoices are in line with the work being performed.
      An example of this is an electrician I worked with who often found cash flow to be tight when working on large build jobs. The majority of the work is performed in the early stages of a build contract, yet he was invoicing more than 50% of the job on completion.
      Given that the timeframe of a job may span 3 or more months this significantly strained his cash flow. A simple change of invoicing 50% for the progress claim brought the invoicing in line with the work performed and made a significant difference to his cash flow.
    1. Consider providing fee proposals for service agreements and invoicing the service monthly on a fixed fee arrangement. his also assists with cashflow for your customers as it spreads the cost out for them. Further, implementing direct debit as a set and forget process ensures you receive regular cash injections, and avoid the need to chase outstanding payments.
    1. On a similar theme to the above tip, ask suppliers for arrangements to pay ongoing expenses in monthly instalments to spread out payments. This will reduce “lumpy” payments which can put strain on cash for a business.
    1. Where your business has significant wages and superannuation expense, consider depositing the PAYG Withholding and superannuation obligations in to a separate bank account at the time each payroll is prepared. Discipline is key here. Although it is tempting to touch the funds when needs arise, the promise of “I’ll pay it back” is rarely kept and businesses are unable to meet tax and superannuation obligations as they fall due.
    1. Cash is often used to purchase stock items, which then sit on the shelf waiting to be sold. Reviewing stock purchasing practices to limit stock holdings is an effective way of improving cash flow. Ordering more frequent, smaller quantities of inventory items may improve cash flow for a business. In addition to this, where stock is not selling, it is worth considering promotions to sell the stock and collect cash to reinvest in other popular stock items.

    As a final note, a business which generates small, or no profits, will undoubtedly face cash flow strain with business owners forced to inject their own funds, or seek other external funds to prop up the business. Reviewing the profit and loss on a regular basis will enable a business owner to identify those expenses which should be reduced, or eliminated.

    Need further guidance to improve cash flow in your business? Contact me to discuss your business cash flow needs.

  • Debt Collection Practices that Work

    Debt Collection Practices that Work

    As a business owner, it is frustrating when a client does not pay on time. And it gets worse when he refuses to honor his debts. What more, you now have to deal with the unpleasant task of asking for your money back.

    One of the things I have learned working with small business owners is that many companies have difficulty with late-paying and non-paying customers. When this happens, don’t shy away, learn to face this challenge head on. If payment for your product or service is delayed, your cash flow suffers, crippling your business operation.

    So what’s the best way to ask clients to pay up? Before You Extend Credit to Any Client…

    Check the client’s creditworthiness.

    Ask for trade references and contact them for a standard background check.

    Look around your industry when drafting your credit terms.

    They need to be competitive, reasonable, and generally lower for new customers. Insist on upfront payments or 50% pre-payment if a client is new or if the amount of credit he is asking for is too high.

    Create a contract with clear terms and conditions.

    The payment terms have to be clearly stipulated in the contract and the customer must sign it.

    How to Chase Payment Politely: Here are basic yet effective practices to collect what clients owe from your business.

    1. Be prompt in sending your invoices.

    The earlier your clients receive their invoices, the better. Online invoicing makes it easier and faster to send an invoice to clients. Automation of recurring bills is also simpler with plenty of  online tools available.

    1. Assume the positive.

    Clients might have just forgotten the bill or have not received it, so send them a gentle reminder. Give them the benefit of the doubt during the first follow-up call, email, or letter. Be sincerely helpful and positive. It also helps to clarify who is the person responsible for invoice payments.

    1. Be assertive.

    It is easy to lose your temper when a client ignores your payment reminders. But don’t take it personally. Stick to the facts and ask for payment in a clear, concise, and direct manner upon the third collection letter, email, or follow-up call. Stay professional and steer clear of offensive language. You might not want to keep the customer but you still want to get your money back.

    1. Contact the debtor in multiple channels.

    With modern communication channels at our disposal, there are plenty of ways to fool proof your message. Use various means to reach your customers. It’s not enough that you send them an email to follow up on a payment – reach for the phone and confirm if they receive the invoice.

    1. Handle disputes or complaints promptly.

    If a customer claims that your product is faulty or the service is poor, resolve the matter as quickly as possible. Protect yourself by having clients sign a proof of service or product delivery. It is unlikely that you can recover outstanding debts if the product delivered was defective or the service was subpar.

    1. Assign a competent employee or a reputable debt collector for this specific task.

    Bring in external help if necessary. For long overdue credit, sometimes it’s best to delegate the debt-collection task to agents well-versed in retrieving what customers owed a company. When choosing a debt collection agency, be sure they abide by the Fair Debt Collection Practices Act.

    While retrieving outstanding debts can be awkward and difficult, your headache will be less if you have clear and organised records of all your business transactions with clients who owed you money.

    What debt collection practices do you find helpful when dealing with delinquent clients? Share them in the comments below.

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  • Turn Cash Flow Struggles Into Growth Opportunities with These 9 Tips

    Turn Cash Flow Struggles Into Growth Opportunities with These 9 Tips

    Cash flow is one of the biggest concerns of all business owners, large or small. Unexpected changes, low profits, late payment of customers and other factors can cause major cash flow problems for many.

    Small business owners are likely to be hit hardest. When cash flow troubles come, they may not have enough cash reserves to tap into and keep the business afloat. That’s why managing cash in-flows and out-flows is a very crucial aspect of running a business.

    Following are nine tips to improve your cash flow and avoid serious financial setbacks down the line.

    1. Bill your clients regularly

    By billing your customers on a regular basis, the cash in-flows will be more consistent.

    Customers see the value of your product or service at the time it is delivered. As time goes by, the perceived value of the product or service is diminished.

    Take advantage of the fact that customers are more willing to pay for your product or service at the time they have a need for it. You’d be surprised that they are more willing to accept your offer at a higher price.

    2. Implement systems to follow up debtors regularly

    Chasing outstanding debts is usually dreaded by most business owners. But it’s one of the most important aspects of maintaining positive cash flow.

    Develop procedures to minimise the number of days debtors remain outstanding.

    You could offer a discount for early payment, send friendly reminder letters when debts are overdue or follow up with a phone call at a later date.

    3. Make it simple for a customer to pay

    Offer alternative methods of payment, such as EFTPOS & Credit Card facilities, accepting direct deposits, as well as cheques and cash so customers can conveniently pay.

    Further, if your customers offer payment, and you know how much to charge them, do not turn down the offer. They are clearly willing to pay you there and then.

    If you turn down the payment and ask them to pay at a later date, you are risking the possibility of a delayed payment, or no payment at all.

    4. Seek upfront deposits/retainers

    Before commencing large contracts or ongoing service arrangements, seek an upfront deposit.

    This will assist with your cash flow at the start of the project and also ensure your customer is committed to your product or service. As the assignment or project progresses, ensure you invoice progress claims.

    By invoicing in regular smaller amounts, it is easier for your customer to find the funds to pay your bill, hence improving the cash flow for both you and your customer.

    5. Adopt regular payment arrangements for recurring expenses

    It is much easier to find $200 a month than $2,400 in a lump sum amount when it comes time to pay for your annual fees.

    Many suppliers offer “pay by the month” alternatives because it helps their cash flow as well as yours.

    Expenses you may consider paying on a monthly basis are:

    • Insurance
    • Licences & subscription fees
    • Professional fees – accounting, legal & other consulting fees
    • Superannuation

    6. Inventory Control

    Monitor stock levels carefully. A stock which sits on the shelf for long periods of time is costing you money.

    This is because you’ve made the cash outlay on the purchase and are waiting for the cash inflow from the sale.

    Implement an inventory control system where stock items are purchased on an ‘as needed basis’ to try and minimise the length of time the stock is gathering dust on the shelf.

    7. Undertake credit checks

    For large sales, seek references from your customers about other suppliers they use. Call them to run a background check and confirm they have a good payment history.

    If the feedback received is negative, consider asking upfront payment, or turning the sale down.

    A sale with no payment effectively means no sale at all. Or it could only cost you time and money chasing the outstanding debt.

    8. Communicate

    Be sure to communicate your payment terms with customers at the time of sale. This way, customers are aware of your expectations for payment.

    Also, if you are having difficulties meeting your supplier payments, speak to them in advance. This will help maintain good supplier relations.

    Remember, communication is key.

    9. Prepare a cash flow budget

    A budget is vital for monitoring the cash flow of your business. Prepare an estimate of the monthly cash inflows and outflows, and compare the budgeted figures with the actual flow of funds.

    A cash flow budget should be prepared yearly, and adjustments should be made according to changes in anticipated cash receipts and payments as they arise throughout the year.

    When preparing your budget, consider the following:

    • A sale doesn’t necessarily equal a cash inflow. You need to allow for the time difference in making the sale and receiving payment.
    • Allow for seasonal fluctuations, and the effect of holiday periods such as Christmas and New Year.

    Without positive cash flow, even the most successful of businesses can fail so give these cash flow management tips a try. When you do, let us know. I always love hearing stories about small business owners who turn their struggles into success.

  • Where did my profit go?

    Where did my profit go?

    “How did I make that much profit? I don’t have that much money in the bank.”

    It’s not uncommon for business owners to ask this question. But there’s a logical explanation behind it and the answer can be found in the balance sheet. It’s called ‘a statement of financial position’ for a reason.

    By looking at this key financial report, you can get a snapshot of:

    • what your company owns (assets) and owes (liabilities/debts);
    • how much you have invested in it; and,
    • why your business profit doesn’t match what’s on your bank account.

    What are the common uses of business profits?

    For starters, let’s take note of some common ways business owners use their profits (ie. the remaining revenue after expenses):

    1. Make loan repayment
    2. Invest in new assets
    3. Buy inventory
    4. Pay dividends

    Further, where you have invoiced a customer and they are yet to pay you, the debtor amount (accounts payable) also contributes to your profit allocation.

    Since business profits can manifest in many forms including the money in your bank account, the profit amount you see on the balance sheet is not the same amount you have in the bank.

    Here’s a sample illustration

    For example, a fictitious small business named XYZ Pty Ltd, made a profit of $25,000 for the year.

    Although the profit is not sitting in the bank, the money has been used in the ongoing operations of the business.

    This is illustrated in the balance sheet below:

    balance sheet

    The table above shows how to compute for the profit allocation. Get the difference between the balance sheet items of the current year (20YY) figures and the prior year (20XX) figures and you will derive the total amount of profit, which is $25,000. But how much of this amount is considered cash at the bank? Only $5,000.

    So where did the rest (i.e. $20,000) of the profit go? Check the stock on hand ($2,000), unpaid debts of traders ($3,000), and repayment of bank loan ($15,000). Add them up and you’ll get the total profit of $25,000.

    That’s why you don’t see all that money in your bank account. So, yes, it’s possible to have a huge amount of profit on your financial report yet have less money in your account.

    Profit increases assets, decreases liabilities

    As you can see on the balance sheet, you use profits to buy new assets or pay off loans or debts.

    A Profit and Loss statement or income statement is another financial report that you can use specifically for profit analysis. This report contains the summary of the operating activities, revenue, expenses, and income during the course of the year.

    Although the balance sheet and profit and loss statement may present different information, they are interrelated. Understanding both financial reports can empower business owners to make adjustments and better decisions to ensure success.

    Do you have more questions about balancing the books? It’s always smart to seek professional help when you’re confused.

    Have your books checked for accuracy and gain clarity by asking your accountant to explain how you can use the financial statements to your advantage.

    Like this post? Here are other articles you might also like to read: 

  • Why Cash is King, and How Every Business Owner Can Manage It Better

    Why Cash is King, and How Every Business Owner Can Manage It Better

    You’ve heard the saying “cash is king”, and as a business owner you can attest to that from your own experience running a company.

    Receiving payment for a sale of your products and services is not difficult. The real problem is when. If only you can collect payments instantly after you have made the sale, you would worry less about cash flow.

    However, this is not the case in actual practice. Sometimes you get paid 15 or 30 days after you deliver a product or a service. The worst customers even delay the payment for 90 days.With this set-up, a few businesses may appear to be making unimaginable profits yet in reality, they are suffering from poor cash flow.

    With this set-up, a business may be making unimaginable profits yet in reality, they are suffering from poor cash flow.

    How can a business have profits yet experience poor cash flow?

    Quite simply, the profit or loss of a business is calculated as the total income minus expenses.

    The income is recorded at the time the invoice is generated. Expenses are documented when they are incurred, regardless of whether they have been paid. A profitable business may have a negative cash flow if there are high accounts receivables (customers owing you money) and large inventory levels on hand waiting to be sold.

    Besides these, tight supplier payment terms and the requirement to service debt greatly affect cash flow. Under these conditions, a profitable business will suffer severely from cash flow constraints.

    For growing businesses, the strain on cash flow is amplified. Consider that you have attracted many new clients, and as a result, your revenue has doubled. The increase in sales would be putting further pressure on cash flow due to the additional costs incurred in labour and inventory to make that sale. The delays in receiving payment for the sales will further worsen the cash flow problem.

    There’s a term for this – Growing Broke

    For most small business owners owners, growth is a common goal. However, rapid growth can create volatility and hinder cash flow in unpredictable ways.

    When a business grows too rapidly, you risk compromising the quality of the product or service you provide. Workers are forced to cut corners to meet production demands. In the process, they make more mistakes because they are pressured to work faster to keep up with a higher sales target.

    For example, you want to raise the sales volume of a particular product or service. Workers need great attention to detail to maintain a certain standard of quality. With your current staff, your can generate 100 pieces of a certain product on average but if you push for a higher sales volume, say to 1,000, you cannot guarantee that they will be done with the same level of excellence.

    What measures can you take to control your cash flow?

    Here are a few proven tips to smooth out your small business cash flow:

    1. Put a system in place to measure and predict the cash position of the business on a weekly basis. This is one of the most overlooked parts of managing a business. Make educated cash projections based on the financial data you have accurately gathered.
    2. Plan for anticipated cash shortages. Contact your bank early for a line of credit or overdraft facilities before a crisis strikes.
    3. Negotiate longer payable terms with suppliers. If you have been a good client to them, they will be willing to extend the terms. They have a vested interest in keeping you in business.
    4. Review the profit and loss for those unnecessary expenses that can be reduced or removed. You’d be surprised that there are tons of ways you can cut costs and run your business as lean as possible.
    5. Implement strict accounts receivable policies. Most businesses have upfront payment collection and impose cash on delivery to slow-paying customers.
    6. Invoice regularly and offer multiple ways to make it easy for customers to pay. Timely invoicing and simplifying payment will pay off.

    Is your business growing broke? If not, this is the best time to implement these changes in your cash flow management. And if you need assistance, seek a trusted accountant or a business advisor to help you handle your cash flow challenges and plan wisely for the next few weeks, months, or even years.

  • Struggling with Cash Flow?

    Struggling with Cash Flow?

    Cash flow is one of the biggest concerns of small business owners. Managing cash flow is an important aspect of running a business. Following are some tips to assist you in improving your cash flow:

    Bill your clients regularly

    By billing more regularly, the cash in-flows are more consistent. Customers see the value of your product or service at the time it is delivered. As time goes by, the perceived value of a product or service is diminished. Customers are more willing to pay for the product or service at the time they have a need for it, and hence are often more willing to accept a higher price.

    Implement systems to follow up debtors regularly

    Although probably one of the most dreaded tasks of running a business, chasing outstanding debts is one of the most important aspects of maintaining positive cash flow. Procedures should be developed to minimise the number of days debtors remain outstanding. You could offer a discount for early payment, send friendly reminder letters when debts are overdue and follow up with a phone call at a later date.

    Make it simple for a customer to pay

    By offering alternative methods of payment, such as EFTPOS & Credit Card facilities, accepting direct deposits, as well as cheques and cash, customers are not faced with the difficulties of having to go elsewhere to obtain the funds needed to pay your bill. Further, if a customer offers payment, and you know how much your fee will be, do not turn the offer down. The customer is clearly willing to pay you there and then. If you turn down the payment and ask them to pay at a later date, you are risking the possibility of a delayed payment, or no payment at all.

    Seek upfront deposits/retainers

    Before commencing large contracts or ongoing service arrangements, seek an upfront deposit. This will assist with your cash flow at the start of the project and also ensure your customer is committed to your product or service.

    As the assignment progresses, ensure you invoice progress claims. By invoicing in regular smaller amounts, it is easier for your customer to find the funds to pay your bill, hence improving the cash flow for both you and your customer.

    Adopt regular payment arrangements for re-occurring expenses

    It is much easier to find $200 a month than $2,400 in a lump sum amount when it comes time to pay for your annual fees. Many suppliers offer “pay by the month” alternatives.  It helps their cash flow as well as yours.

    Expenses you could consider paying on a monthly basis are:

    • Insurance
    • Licences & subscription fees
    • Professional fees – accounting, legal & other consulting fees
    • Superannuation
    • Inventory Control

    Monitor stock levels carefully. Stock which sits on the shelf for long periods of time is costing you money. This is because you’ve made the cash outlay on the purchase and are waiting for the cash inflow from the sale. Implement an inventory control system where stock items are purchased on an as needed basis to try and minimise the length of time stock is gathering dust on the shelf.

    Undertake credit checks

    For large sales, seek references from your customers of other suppliers they use to ring and confirm they have a good payment history. If the feedback received is negative, consider asking for payment upfront, or even turning the sale down. A sale with no payment, effectively means no sale at all, and only costs you time and money in chasing the outstanding debt.

    Communicate

    Ensure you communicate your payment terms with customers at the time of sale. This way, customers are aware of your expectations for payment.

    Also, if you are having difficulties in meeting your supplier payments, speak to them in advance. This will help maintain good supplier relations. Remember, communication is key.

    Prepare a cash flow budget

    A cash flow budget is vital for monitoring the cash flow of your business. Prepare an estimate of the monthly cash inflows and outflows, and compare the budgeted figures with the actual flow of funds.
    A cash flow budget should be prepared on an annual basis, and adjustments should be made according to changes in anticipated cash receipts and payments as they arise throughout the year.

    Remember when preparing your budget, a sale doesn’t necessarily equal a cash inflow. You need to allow for the time difference in making the sale and receiving payment. Also, don’t forget to allow for seasonal fluctuations, and the effect of holiday periods such as Christmas.

    Without positive cash flow, even the most successful of businesses can fail.