Poor cash flow is one of the biggest reasons why businesses – and particularly small businesses – fail. Michael Jamieson shares his top tips for improving and managing cash flow in your business.
- A sale is not a sale until you have been paid. Too many business owners run themselves ragged doing the work but put chasing overdue debt far down their list of priorities. What is the point of doing all the hard work if you are not going to get paid?
- Make sure you have a good set of terms and conditions which clearly specify your timelines for payment. Ensure all clients are sent these terms and conditions and are aware of them. All pricing or invoice documentation should specify the payment due date. This makes any action you take on overdue debt much easier to enforce. Don’t worry about asking for payment immediately after the debt has become overdue – this is exactly when you should take action. You informed your client of the payment terms and they engaged you under those terms. Anyone baulking because they were contacted so soon after the debt became overdue should consider that it is them who have broken the terms and conditions they originally engaged you on.
- Credit check everyone you are considering granting a delayed payment option to. Many slow payers have a history of delayed payments and defaults. Granting credit terms to anyone is a privilege, not a right, and should only be given to those with a sound credit rating.
- When scheduling work for you and your staff, factor in time to address any queries or objections on previous work carried out for clients. One of the tactics used by slow payers is to object to the standard of work and use this as an excuse to refuse to pay. Allowing yourself or staff time to correct anything not up to specification shuts down the objection. A lot of businesses let rework or sorting out objections slide down their priority list, and as a consequence overdue debt mounts up. Finishing an existing job and getting paid should be the priority.
- Don’t let fear of confrontation put you off asking for overdue money. A reasonable and good customer will have engaged you knowing they have the means to pay you and the expectation of paying you. Anyone getting confrontational over payment is a warning sign that they are not going to be reasonable, and an indication that you should consider ceasing dealing with them.
- Remember that not all of the money you collect in is yours. You collect GST on behalf of the government when you receive debtor payments. You must pay provisional tax on your profits. You hold back PAYE from employee payments. All of this money must be paid to the Inland Revenue Department at set dates over the course of a financial year. I recommend setting money aside, for example in a separate bank account or term deposit account, to make it easier to meet these payments when they fall due.
- Prepare simple weekly and monthly cash flow forecasts using Excel. Forewarned is forearmed. Estimate how much money is likely to be received in a week from your customers and what you need to pay out. This allows you to work out strategies to counteract any anticipated shortfalls. Try and work this out a month ahead as well to give yourself more time to strategize. Your UHY Accountant can help you to create a spreadsheet and can also work with you on strategies to counter any budgeted shortfalls.
- Keep aside money for emergencies. Never exhaust all of your cash reserves and always leave yourself capacity with your lenders. From time to time there will be unforeseen events in your business (or personal) life. These types of events can be stressful and may impact adversely on cash flow. Having money set aside, or the capacity to inject working capital, can alleviate some of the stress and make it easier to deal with the event.
- Plan your capital expenditure. All businesses must stay current with their plant, IT, vehicles and other infrastructure. It is essential to budget to ensure you can meet the repayments on any financing required to upgrade those assets. If you are going to struggle to finance capital expenditure, it may be a sign that you are growing too fast, or that you need to restructure your organisation. Your UHY Accountant can assist you with planning and structuring for capital expenditure.
- Plan your growth. At the moment the New Zealand economy is buoyant and there is an excess of work available in many business sectors, but this environment can be as dangerous to businesses as a recession. The reason is that they can grow in an uncontrolled fashion. Often businesses must pay for growth out of cash flow before they will receive payment for the increased workload, for instance hiring additional employees, or buying vehicles or equipment up front. You should always plan how to fund growth. If you cannot afford the necessary upfront payments, it may not be advisable to take on the new work. Once again, your UHY Accountant can help you with planning for growth.
UHY Haines Norton’s Business Improvement Manager Michael Jamieson works with businesses to help them improve their cash flow forecasting and management. If you would like to discuss any aspect of cash flow please contact Michael on 027-663-6062 or email firstname.lastname@example.org.