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Cash flow made simple – steps to keep your business in the black

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Poorly-managed cash flow has brought many good businesses down. So how can you stop yourself becoming another statistic?

To make sure this doesn’t happen to you, it’s important you have systems in place to protect your business. I’ll share some simple steps to keep your cash flowing and your business running.

Remember, a great cash flow process not only reduces your need for borrowed funds, lowers the chances of a cash crisis and bad debts, but it also gives you a lot more nights of better sleep!

When I caught up with Steven Smith – founder of United Focus, a South Australian-based internet strategy and advisory firm – he pinned himself as an “accidental business owner”. Stick with me on this – no doubt many of you will find this a familiar story.

“I don’t think you start out with the intention of being a business owner,” Smith told me.

“For me it was a by-product of fulfilling a desire to spend my working day doing work that really interested me.”

Yes, being in business for yourself is all about doing what you love. But the upshot of this is the mundane, but important, duties such as managing projects, writing invoices and controlling cash flow are often left in the lap of the gods. Smith admits the business aspects – accounting, invoicing and general management – are not his strength, nor his passion. Still, this is no excuse!

Since launching United Focus in 1995, the former teacher has learnt a valuable lesson – as boring as some business tasks may be, they still have to be done. And cash flow is at the top of this list.

But cash flow isn’t just to do with your balance sheet – it resonates through every element of your business. For instance, Smith opted for a home-based operation rather than renting a serviced office – this saved his bottom line during the start-up years.

“I considered serviced offices because I blindly followed the common wisdom that professional business people work out of formal offices. But when I investigated offices I found them to be more expensive than I had anticipated and I didn’t like any of them.”

Smith offers the following tips to ensure you stay on top of your cash flow:

  1. Mark on a calendar when invoices are due to be sent and paid, as well as when bills and taxes are due and monitor it all regularly.
  2. Commence chasing new work at least six weeks before you see a gap in invoicing of more than a fortnight.
  3. Don’t avoid chasing new work on the pretence of being busy doing marketing plans and reorganising your office!
  4. Negotiate invoicing a client as often as practicable – don’t wait to issue one or two big invoices.
  5. Make invoices payable in 14 days – not 30.
  6. Always know to whom the invoice must be addressed, the exact wording required and request a confirmation of receipt of the invoice and an acknowledgement of the 14-day payment terms. This reduces the risk of a bureaucratic error affecting your cash flow.
  7. Negotiate a commencement payment (up to 15 per cent) and invoice as soon as you begin. This way, you'll be paid within two to three weeks of starting the work.
  8. Monitor the payment of invoices and contact the client if payment is not received within two days of the due date elapsing.
  9. Maintain a good relationship with your bank and speak with them before you hit a cash flow crisis. 

Smith certainly has the right idea with the above. Here are some more cash flow tips to keep you in the black:

  • It’s also a bright idea to develop a cash flow projection. Ensure you monitor and update it regularly.
  • Have a credit policy stated clearly on your invoices of payment terms.
  • Your accounts payable policy should be outlined at the outset of every credit relationship.
  • Have a script for ringing late payers.
  • Do credit checks on any customers you’re heavily exposed to.
  • All of these are systems that are key to the survival of your business – implement these and regularly review them to ensure your business stays in the black!

So, if you’re looking to work on your business rather than being stuck in it, book in for a complimentary business assessment today with Switzer Business Coaching

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: Thursday, June 10, 2010

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