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7 steps to get more cash in the door

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Headaches and hiccups in business are almost always related to cash flow. Or, more accurately, a lack of it!

The painful truth is this: in business, cash is king, and any business keen on avoiding an untimely end must be on top of their cash flow.

Your business may be profitable, but if you don’t have enough cash coming in regularly to meet your expenses then you will quickly go out of business. If cash flow is the life of every business, you need to have your finger firmly on the pulse.

One man who’s on the money is David Egerton-Warburton, managing director of the Master Group, a West Australian-based business specialising in cash flow and financial management software, consulting and support.

“We sell cash flow management. We have to be good at it ourselves, we have to practice what we preach,” Egerton-Warburton said when we interviewed him for our latest magazine in the Small Business Series — Your Family Business.

The key is to be realistic, and to exercise restraint.

“We only bought things when we could afford them,” he said of his company’s start-up period. “It was a whole lot of little, tiny targets. There were a lot of nervous days; we were hand-to-mouth like a lot of businesses at the start.”

But cash or no cash, management of it is crucial.

“Cash flow management is the pulse of every business. It’s whether you’re alive or dead, really. Going to an accountant or adviser is like going to the doctor. They can tell you you’re crook or that you’re fine, but they can’t feel your pulse for you every day.”

Egerton-Warburton told us that cash flow management should be part of every business’s daily practice, and that a strong financial management system is crucial in planning your future growth.

“The big trick is to use your numbers to look forward, not back. It’s knowing where you’re at, it’s confronting the brutal truth about your business every day and, saying what’s our forecast for the end of the month? What can we afford, what can’t we afford?”

So if you need to get more cash in the door, there are seven sure-fire steps to improve your business’s cash flow.

1. First up, set your credit terms carefully.

The need to extend credit to customers is a fact of life for most businesses, but it’s important to set clear limits. Carefully research the standard credit period for your industry and make an honest assessment about the consequences of shortening your credit terms. Reducing your payment period from 90 to 60 days might lose you one customer, but if the other 99 will pay more quickly it will be worth it.

2. Make your debtors pay quickly.

It is vital to master the art of debtor management. One suggestion to ensure debtors know how much time they have is to send payment notices on different coloured paper. For example, with 30 days to go, send a blue notice, 15 days an orange one and bright red reminder when payment is required immediately.

Talk constantly with major debtors as payment deadlines approach, and perhaps pass by their offices so you let them know you’re around. Why? The squeaky wheel often gets the oil. A small discount for early payment can also provide an effective incentive to put that cheque in the mail.

3. Pay your creditors slowly.

No one ever said business was fair. Take advantage of credit terms where you can and prioritise costs according to the severity of the consequences for not paying. Wages, taxes and direct debits are at the top of the list, key suppliers second and everyone else after that.

4. Smooth out the lumps.

Know when lean cash flow patches are coming and plan accordingly. It is invariably more difficult to get debtors to pay at BAS time and over Christmas, so make sure you have a bit of leeway in your cash accounts to pay wages and other inflexible expenses during these periods. Equally, avoid funding major purchases from your business’s working capital unless you’re sure you have the cash to cover it.

5. Use finance products effectively.

Overdrafts, premium funding, lease facilities and cash flow funding products can all be excellent tools to help match a business’s cash supply with planned outlays if used sensibly. Even the business credit card can be a good way to ease the squeeze as long as you’re sure the debt can be paid before interest kicks in.

6. Don’t incur penalties.

The Australian Taxation Office and the Australian Securities & Investments Commission both impose penalties for late lodgements or payments in some circumstances. Paying these debts first will save you money and stress.

7, And lucky last, keep your hands out of the till.

Discipline yourself to make cash drawings only in line with conservative cash flow forecasts. Cash drawings are effectively just another expense for your business and should be treated accordingly.

Hopefully this advice will help your business’s hip pocket!

Work on your business, not in it. To learn how, book a complimentary business assessment today with a Switzer Business Coach.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.


Published on: Wednesday, April 21, 2010

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