Are you on top of your cashflow? Three things you should be tracking…

In small business, cash flow is everything.  It can literally mean the difference between doors open one day and doors firmly and permanently closed the next.

In Australia, it is illegal to trade whilst insolvent.  In basic terms, it means that you cannot order or commit to something (goods, services) unless you have the means to pay for them.

But managing cash flow is not just about the money you have in the bank.  It is represented in a number of ways including:

  • Money or services you have invoiced but not yet received (your debtors)
  • Money or services you have invested but not yet invoiced (works in progress)
  • Money you owe your creditors (goods or services received but not yet paid for)

So the upside is that you may have more than you think.  Sounds good in theory, but small business can be tough.  So what if that one purchase (even if you don’t technically have the money right now) is the difference?

Step one: Manage your debtors

Some businesses have near-instant gratification when it comes to payment for works.  Others can wait months to be paid.  It is vital that you understand your business setup with regard to payment terms and manage to them.

  • Take every opportunity to invoice quickly (ideally directly after the work is complete, or even requesting an advance payment). The longer it takes that invoice to get into the system – the longer it is until that money hits your account.
  • Set mutually agreed minimum payment terms. Don’t assume automatically that your regular terms are those that will be accepted by the other party. Have this discussion in advance of works commencing or sales occurring so that all parties are clear on the payment terms agreed. We recommend that you keep your payment terms short – it keeps the cash flowing in realistic timeframes for your business.
  • Stay in contact with your debtors during the period between invoice and payment date to ensure that communication channels stay open and so you can monitor the situation closely.
  • Don’t wait to make contact with your debtor immediately an invoice falls overdue. There could be hundreds of reasons why so if you can, reach out to your debtor and try to understand their situation.  It gives both parties an opportunity to communicate and rectify the situation promptly.

Step two: Know what your work in progress (WIP) is worth

For service-based businesses, this calculation can mean the difference between a negative Profit and Loss statement and a positive one.  Even moreso, information on your WIP can enhance your ability to make good decisions when procuring (and therefore on your debts) so as not to send someone else into difficulties.

  • Keep track of your work in progress, including remaining effort to complete the job and approximate time you can expect to invoice (and hence get paid). This will help you with your cash flow (you can use these calculations to estimate your forward position – that is, your estimated cash position on a given date in the future)
  • Same scenario when it comes to stock control. Lack of organisation around stock management could cause you to over-order and incur unnecessary costs.  Additionally it could leave you with excess stock you cannot sell, which turns it into a loss.
  • Again – and we cannot stress this enough – don’t hold onto your invoice requesting payment. Even a delay of a few days to a week can (with the aid of a misplaced public holiday or banking error) cause significant troubles.  Early and often is our motto.

Step three: Know what you owe!

The flip side of all of this of course is that along with the obligations of your debtors to meet your requirements, usually the same is required of you.  Few businesses issue invoices for works completed without first incurring some sort of cost themselves for which they owe money (labour, stock, rent and such). Failure to track and maintain these expenses can leave you critically short when it comes time to make payment.

  • Plan for the costs you know about and try to plan for those that are less obvious. For example, as a creditor you might have a direct debit set up from an account for a monthly service you procure.  If you do not have information on when that money is being debited, for how long that debit continues into the future and the amount, you run the risk of setting up additional payment options that will drain your account and leave you at the mercy of your bank’s overdrawn fees.
  • Remember that just as your debtors wear the responsibility of supporting your business through prompt payments, so too do you have the same obligation for businesses you owe money. Too many times a business runs too close to the line and is forced into bankruptcy, only to start an inevitable chain reaction of stress and potential business failures with those creditors still owed funds. Importantly this is not just a small business issue – businesses of all sizes can succumb to this outcome when planning and careful management is abandoned in favour of rapid growth.

So there it is.  Small business is tough (a fact I don’t feel many recognise or appreciate to it’s full extent).  If everyone did their part and paid on time a significant portion of this stress could be alleviated and maybe small business could get just that little bit less stressful.

Want to see just how on top of your finances are? Snag our FREE FINANCES CHECKLIST 

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