Cash Flow

You might have heard the phrase ‘cash is king’, it is the lifeblood of your business.

No cash = no business.

In its simplest form Cash Flow is the flow of cash in and out of your business. Knowing your bank account balance every day is just the start of managing cash flow. Business owners also need to take into account how much money is due to come in to the business, and, how much is due to go out. When these basic steps of financial management are ignored, it’s not unusual to see a mad scramble and a lot of stress as the end of a BAS reporting period gets closer. The good news is, there are plenty of things a business owner can do to make their own lives easier and to make their businesses financially healthier.

Here’s 3 tips from us that we know can make a difference:

1. Reconcile your bank account every day

Today’s technology means we have an enormous amount of information available at out fingertips within seconds. This is the reality of cloud-based accounting software. Accounting software is no longer just about recording financial data, the best software can be a powerful business management tool that can be used anywhere, any time, and, on any device. We find it quite baffling that business owners will dance to the tune played by their bookkeepers and accept reconciling of their accounts only once per month. By the time this is done, the information is stale and of little value for the ongoing financial management of a business.

Why have this technology available if the information is not up to date? Daily reconciliation of your accounts changes this – it will give you a true picture of your financial position every day of the week. That is – how much have you got, how much do you owe, how much is owed to you – and what can you do about these right now? We do daily reconciliations for our clients because we know that if you want to remain in business it is not good enough to wait 3-4 weeks to see what’s going on with the money. Again, knowing your bank balance is not enough – there are bills to pay and money to collect.

2. Open a separate bank account for Tax and Super liabilities

Whenever you get a sale, you are collecting GST. Reality check: GST collected is not your money!

Your pricing strategy should cover all of your overheads and hopefully turn a profit. If you are relying on money from GST collected to keep your business afloat then it can be a clear indicator of a cash flow problem. Some investigation and analysis may reveal that a ‘cash flow problem’ is really a business management problem. Is your pricing too low? Do you need to increase your sales? Are your customers paying you on time? Are your expenses too high?

Some analysis of these factors can help you to identify what is going wrong and where to focus your energy to bring about change. For example, perhaps you need to chase up overdue invoices sooner or reduce your terms of trade to a shorter time period. Your sales people may need some training to close off more deals. You may need to increase your prices – if you think your customers won’t tolerate that, ask the serious question – is the business really viable?

Now, back to that separate bank account. Your accounting software should be able to provide you with current balances for your GST Liability, PAYG Withholding Liability and Super Liability in a glance. If it doesn’t, come talk to us about Xero. We know the balances of these liabilities will shift around throughout the month, especially GST, but those relating to employee wages and super often work out to be fairly consistent from one month to the next. If you know that every month you’re up for say $5k to cover these, then you can provision for it by regular transfers it to a separate account and move the money covering these liabilities out of your main bank account.

3. Adopt systematic processes to chase up overdue invoices

A ‘good customer’ can sometimes get away with constantly paying you late because they are a ‘good customer’. Maybe it’s time to have a re-think of what a ‘good customer’ really is. We believe a good customer pays their bills on time and keeps coming back for more business. In this way, a good customer will not be the underlying source of a cash flow problem, they won’t be the ones wasting your time chasing up payments. They won’t be the ones causing you grief when you’ve got wages to pay but you’re counting on their payment to do that. Any time that you engage in debt collection activities, it represents a cost to your business – time that could have been spent more productively. Good customers don’t add costs to your business. Anything that costs you time can be costing you money.

A systematic approach – if payments are one day late, it’s time to start taking action. A friendly reminder straight away is just the start and it may be all that you need. When you do this consistently those ‘good customers’ will know that it is not ok to drag the chain. Keep chasing and request a firm commitment to pay. Note the commitment, and, if the money still isn’t received by the committed date, make further contact the day after. Issue statements – a common practice is to issue statements at the end of the month but you don’t actually have to wait that long. If it’s the 10th of the month and a payment is a week late, are you really going to wait until 30th before you send a statement? If you hit 60 days and still no payment despite your actions, then it’s time to contact a Debt Collection agent. Once a debt gets to 90 days overdue you can almost always kiss that money goodbye. The Debt Collection Act sets out the requirements and obligations of both consumers and organisations. If you want more info, just google it! We recommend Coast To Coast Debt Collections for nation-wide debt collection services.

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