Positive cash flow, rather than revenue or profit, is the best way to tell if a business is performing well. Studies have shown that 80% of businesses go under because they have not properly managed their cash flow.
How can you avoid this happening to your business? Here are the most common reasons for getting into cash flow trouble, and tips on how to avoid getting tripped up by poor cash flow.
Slow paying customers
This is a bugbear of many businesses. If you provide credit to your customers, you put the ball in their court for payment. There are a number of ways to encourage prompt payment, including:
agreeing on payment terms in writing before you transact with a new customer;
providing payment options to make payment easier;
ensuring all outstanding debts are followed up regularly — as always, the squeaky wheel gets the most oil, and
having processes in place for quick resolution of customer disputes that hold up payment.
Don’t be hesitant to walk away from a customer that regularly pays late. This will allow you to put more energy and time into those customers that respect you and your business.
Aged or excess stock
Holding too much stock is like piling up cash in the storeroom. Cash tied up in stock that is not selling can be become a cash flow nightmare.
If you have old stock or too much stock, then you need to take action. Move this stock any way you can, including donating some to a worthwhile charity — which can be used as a marketing strategy by advertising your donations. Holding stock can cost up to 30 percent of the cost of stock — think about the storage and insurance costs associated with holding non-moving stock.
Once you have moved the stock, you will have more room and cash to buy stock that your customers really want.
No allowance for BAS returns
Many small businesses get themselves into a squeeze at BAS time. You have collected the GST, and now need to pay the ATO this GST — but you don’t have enough cash!
Develop a procedure to ensure you don’t get your business into this situation. Have a separate bank account where you can deposit the GST component of your sales regularly (weekly or when you collect your sales income), and when BAS time comes around you won’t be scraping up cash to pay the ATO.
No back-up plan
If your business does experience a cash flow crunch, you need to have a back-up plan. Having a finance facility in place, such as an overdraft or other short term financing, will ensure you can trade your way through any cash flow problems quickly and get your business back on track.
Get a Business Health Check
Just like human vital signs (temperature, pulse rate, blood pressure etc), there are a range of cashflow vital signs you should be aware of to ensure you keep your business healthy. A Business Health Check is a sophisticated review of your overall business’ performance, and critically, your cashflow.
The Business Health Check can also be used to compare your business to similar businesses in the same industry category in Australia. This is the process of measuring KPIs (Key Performance Indicators).
The Australian Business Clinic provides a practical and pragmatic assessment for companies, sole traders and partnerships at all stages of the business life-cycle. We identify blockages in your business growth, areas where you could find efficiencies, and how you could improve the profitability of your business.
Cash flow is the lifeblood of every business, so make sure you keep the cash flowing! Confidence in cash flow not only gives a business greater scope for dealing with problems as they arise, it also allows room for more choices, such as purchasing necessary equipment, paying out dividends to shareholders, and strengthens ties with other business owners and potential buyers.
For expert guidance on keeping your business healthy and cash flow positive, contact us today.