This is one of the most important financial documents your bank or potential buyer of your business will request at the appropriate time.
There is a joke, (maybe could have been a true story) about a couple running a business, met with their accountant and asked how is our business going? He said “You went broke two years ago!”. Obviously no planning and important Financial Reports including a cash flow.
There is no way any staff member would enjoy a guy in a black suit with a stern look on his face walk into your business and tell all the staff that the banks will not let the business continue, pack up your personal things and leave the premises in 1 hour.
Cash flow is and always will be king!
Your business could be booming in regard to hitting sales targets, generating new clients, achieving strong profits but if you don’t have working capital/operating liquidity to be able to regularly pay your staff, suppliers, buy stock etc. your business could be risky and its future in doubt, possibly trading insolvently.
Maintaining a strong cash flow will enable your business to maximise profits.
Plan ahead for the large amounts owing such as statutory payments including BAS, Payroll Tax, PAYG, Superannuation, WorkCover, FBT (Fringe Benefits Tax) etc. An excellent routine is to put these funds away into a separate bank account to ensure you have the funds available ready for the date due.
Getting your cash flow in good shape is even more important from now on especially when the Australian Tax Office (ATO) gets tough with its revolutionary “Single Touch Payroll” (STP). You will soon no longer be able to delay paying the ATO big amounts to prop up your cash flow.
STP starts July 1, 2017. In July, 2018 the ATO will be automatically advised of your PAYG and Superannuation amounts owing each month. If you don’t pay your PAYG (Pay As You Go tax) on the due dates regularly, you could risk the taking money out of your bank account without your consent.
Carefully plan for certain times of the year such as Christmas holidays, Easter, seasonal sales, downturns etc.
You need to set KPI’s (Key Performance Indicators) especially for debtors, creditors and stock to measure how you are tracking monthly. The difference between your average debtor’s collection days being 50 and not 40 can have a significant impact on your cash flow.
So, let’s now turn our attention to the 4 cash flow steps that will secure your business future.
There is no way you want too much cash tied up in debtors. This is your money, overdue that could be used to improve profitability. Do new clients fill in a credit application and checks are done? Do you have a systematic procedure and process of ensuring overdue debts are collected quickly? Do your quotes have a payment deadline?
For new clients, it always good to get a deposit up front and for some they pay prior to delivery for the first two or three orders before they are granted a 7, 14 or 30-day account.
If a prospective client asks for 60 or 90 day terms, consider this seriously, especially the effect on your cash flow. If for example it is a Coles or Woolworths buying high volumes, then it may be worth agreeing to.
You MUST have a designated staff member or outsourced consultant working on your debtors constantly every single week, printing reports, chasing money, sending legal letters, using debt collectors, settling any client disputes as quick as possible, stopping client credit and reporting to management weekly. The older a debt gets the less chance you have of collecting it.
Sending or emailing Monthly Statement Payment reminders is as effective as a “cream puff”.
Don’t be scared to invoice project work progressively and if a payment is not received within the credit terms then you have the right to stop the job. Focus on invoicing clients as soon as you can without delay.
Try and get client money in your bank account as quick as you can. Price packaging is starting to become more and more popular and acceptable so organize a monthly direct debit at the start of each month.
You can offer credit card payments, even discounts of payment within 7 days either by eft or credit card.
Now, this is a golden opportunity to really give a “big kick” to your cash flow position. In this tough economy, there are numerous opportunities to negotiate extended payment terms. Usually they are 30 days from end of month but if you are negotiator you can get this out to 45 or 60 days depending on how much you spend with a supplier assuming you pay on time.
There is no advantage in paying suppliers too early and not advisable to pay beyond your credit terms as it may jeopardise your relationships and delivery of stock and/or services.
You can also ask for discounts on purchasing based on volume and also paying a bit earlier can earn you discounts.
If “have a bit of cheek”, you can ask some suppliers to contribute to some of your advertising campaigns and give them additional product promotion.
An absolute must that most businesses don’t do is review their supplier prices at least every 6 months. Are you receiving competitive process? Are you sourcing new suppliers? Are you annually reviewing your insurance policies, utility providers, telecommunication services and other expenses - where you can save money? Smart purchasing can make a huge difference to your cash flow as well as your profitability.
Never ever assume your Purchasing Officer is doing a great job! Do random checks on the buying procedures, products, prices, quality etc. Make sure there are no “kick-backs” being given out “under the table” to your Purchasing Officer. Myers rotate their Officers regularly to avoid this rort. This is an area of the business where fraud could take easily place.
This is such an important KPI because if you are continually overstocked or a few containers of non-popular stock are bought, these could have a significant on the whole business. An example is a buyer I know who imported loads of containers of chocolate brown sofa sets that sent the business into “meltdown”. Who likes that horrible colour?
Probably the best way to solve this sort of problem is to have a sale to retailers or a one-off sale to the public. Get rid of “dead” stock as quickly as possible!
It costs money especially if you have an overdraft paying for having too much stock sitting on your shelves including floor space, insurance, staff handling etc. And if it sits too long it could go out of fashion pretty quickly.
You must have minimum stock levels and as best as possible put a lot of effort into planning your buying based on how sales are progressing on a 6-week cycle. Just as important is preventing not running out of stock, especially popular lines.
4. EXTERNAL FINANCE
There are various finance options in the market place ranging from an overdraft, secure loan, unsecured loan, debtor finance and trade finance. It is important your business chooses the most appropriate taking into account the conditions and interest fees. Having a professionally done projected cash flow will make it easier to get finance.
The worst thing you can do is wait until you get into trouble to access one or some of these options. Do your research well in advance when things are good and have actions ready to go if problems hit your cash flow.
It is a case of matching the appropriate finance option with your particular need.
IMPORTANT POINTS SUMMARY
You must have a professionally done 12-month cash flow projection that is updated monthly
You must have a systematic procedure of collecting debts as quickly as possible, whatever it takes
New clients must have credit checks done and no account set up until after the initial 2 or 3 orders
It is important to have a minimum stock levels and focus on maintaining good stock levels, especially of your popular selling items
If your business requires external finance, choose the right option that matches your needs and get things in place well in advance.
For more information to affectively manage your cash flow, please contact the expert contributor.