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Seven tools to improve your cash flow

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You may be a master of your trade, but if you don’t keep up to speed with your financial management, there’s a very real danger your business won’t survive. You need to lay the foundations for good cash flow management — it’s crucial to create and implement systems that will make managing your cash flow a breeze.

Consider this: Dave ran a busy plumbing operation. He was so busy he had to take on staff in order to be able to cope with the workload.

Yet despite the flood of work the business experienced, it struggled to keep its head above water — his invoicing system was a mess, he was in the red with suppliers, and call out fees were rarely collected on. As a result, he struggled to find the money to pay the wages, and often ended up drawing on his personal funds to do so — every week it seemed to be the same story. Thanks to poor cash flow management, the business was in danger of going down the drain.

It’s as simple as this: managing your cash flow gap is mandatory if you want to keep your business in the black. So if you need to get more cash in the door, here are some simple steps to improve your business’s cash flow.

1. Set your credit terms carefully

The need to extend credit to customers is a fact of life for most businesses, but it is important to set clear limits.

These will be different depending on whether you work in residential or commercial, so be sure to 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’s 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.

If you collect a call out fee, make it easy to collect — invest in technology that allows you to take credit cards and Eftpos on the go — cash may be king, but not everyone will have it on hand.

Keep the lines of communication open. Talk constantly with major debtors as payment deadlines approach, and especially if they pass by. 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 last.

4. Smooth out the lumps

Know when lean cash flow patches are coming and plan accordingly. For example, in the lead up to the silly season, you know you’ll be frantic as every client wants a new kitchen or a new bathroom in time for their holiday visitors. And, after the Christmas spending season, you’ll find few renovations and fit outs are in demand as potential clients use this time to watch their pennies.

It’s 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 — this includes tools and office equipment — unless you are 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 are sure the debt can be paid before interest kicks in.

Also, make use of government incentives, like the recent investment allowance, to boost your business.

6. Do not 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. Keep your hands out of the till

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

The foundations of good cash flow management

  1. Set your credit terms carefully.
  2. Make your debtors pay quickly.
  3. Pay your creditors slowly.
  4. Smooth out the lumps.
  5. Use finance products effectively.
  6. Do not incur penalties.
  7. Keep your hands out of the till.

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Published on: Friday, July 29, 2011

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