The biggest issue for start up businesses is cash flow. Recently conducted research has revealed that Australian businesses are chasing up to $76 billion un unpaid bills from customers. Additionally the Australian Securities and Investment Commission reported that poor cash flow was a key factor in almost half of all firm failures in 2016.
So how can you manage your cash flow more effectively? Here are ten ways you can stay ahead and in control of your finances:
1. Set up a credit control system
Your credit control system shouldn't be too complicated, it's all about getting paid as soon as possible. However, it is essential to have some procedures in place. The basics include setting clear credit limits and payment terms, invoicing promptly and chasing debts when they're due. To speed up payments, ensure the correct payment details are listed on sales invoices and offer multiple payment methods for clients. Stay on top of payments and avoid or stop offering credit to bad payers.
2. Forecast sales
Forecasting involves predicting what's ahead in an effort to prepare for cash flow peaks and troughs. This can begin as soon as you have a month of sales behind you. To estimate future demand, utilise your market knowledge. Think about pricing, competition levels, state of the economy and so forth, It's better to be cautious rather than optimistic - this way you'll avoid any unforeseen surprises.
3. Cut unnecessary costs and spend
When preserving cash flow, think lean and mean. Analyse every item you buy, know where your cash is going and always get value for your money. Work out what you really need - while the office pot plants look nice they won't increase business.
4. Negotiate good terms with suppliers
It never hurts to investigate whether you can extend payment terms with suppliers. If you have the option to settle a bill in 60 or even 90 days as opposed to 30, it allows you to hold on to money and regulate cash flow. Therefore, when making a large order, don't miss the chance to negotiate. Also find out if you can set up a payment plan rather than a lump sum payment in one go.
5. Manage stock intelligently
Closely monitoring stock and only ordering what's necessary, is essential to avoid spending unnecessary cash. Find out what sells quickly and generates profit to keep your income steady and ensure you aren't tying up funds in slow moving stock. If you're looking for some quick cash, try to sell old or outdated stock for a discounted price.
6. Don’t tie up cash
When orders are coming in, it's always tempting to purchase the latest equipment. However, think wisely before making these excessive purchases and instead hold on to liquid cash. If you're buying assets, such as a computer, ask if the supplier will offer a deal over a year or consider taking out an overdraft.
7. Stay on good terms with lenders
It helps staying on the good side of banks. Ensure your books are up to date, in the event you need to borrow and can therefore show your figures. If you're struggling with repayments, talk to the lender rather than avoiding the problem.
8. Try using invoice discounting
This involves a third party 'buying' your invoice and releases cash based on its value. While this doesn't suit every business, it's a good option if yours is still growing. Some lenders will provide you with up to 90% of the invoice amounts, however fees can be high so always looks at several options.
9. Spot the warning signs
Poor cash flow can come in the form of a drop in turnover, customers delaying payment, incurring late penalties from the ATO and being forced to settle a suppliers invoice later than usual. These warning signs shouldn't be ignored. Generally it's easier to find solutions to increase working capital before copious amounts of debt have piled up.
10. Be realistic about your business
Sometimes to see things clearly, you need to step back. If your cash flow statement is poor and you're constantly struggling, you need to ask why. Are your sales to low? Are your products inadequately priced? Can you chase payments quicker? Maintain a level head about your venture and its future - if you're not making a profit, you may need to rethink things.