Monday 5th September 2016

Cash Flow is the Small Business Killer

 
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As discussed in Part 1, owners who can not efficiently manage their business cash flow are almost certain to fail. Those who can, are able to improve nearly every aspect of their business. Read on for Part 2 of handy tips for all business types.

5. Work With Your Vendors

Just as you want your customers to pay you, you vendors want payment as soon as possible. However, to avoid hurting your cash flow, delay early payment as long as you can while remaining in line with the terms of the sale. If there is no penalty for late payments, set a pay cycle of 45 to 60 days from receipt of an invoice. While slowing the outflow of cash is important, it is equally important to maintain a good credit rating and cordial relations with critical vendors.

If you are forced to delay payments outside of payment terms, contact the vendor as soon as possible with an explanation and a plan to become current on your debt.

 

6. Maximise Cash Inflows

There are a number of successful methods to increase cash flow, especially if you sell custom products or engage in extended contracts. If the product or service is unusually large, complex, or one of a kind, ensure a security deposit equal to 50% of the order is paid.

If you work with contracts, set up payment schedules and amounts that parallel or exceed your sunk costs. If your customer demands modification of standard products or services that have not been identified in your contract, seek additional payment through fees or change orders.

Consider subscription sales whereby customers prepay if you are a small business providing a regular service or product. 

In addition to receiving upfront cash to cover future costs, you have the advantages of securing future sales and easier resource scheduling.

As another option, layaway programs have come back in vogue as an alternative to sale and payment plans. A layaway program allows customers to select a specific product, which is then reserved for a future purchase and delivery when payment has been completed. This allows the seller to have use of the cash prior to incurring the product's cost. Special accounting treatment of the cash received is required, so be sure your accountant is aware of the program. Consider taking credit cards to ensure timely and probable payments, as well. If you elect to do so, raise your prices to compensate for the extra costs and give those customers who pay cash a discount equal to the fee that would be paid for a credit charge.

 

7. Shrink Cash Outflows

The combination of cutting or avoiding expenses overall and delaying payment as long as possible reduces demands on cash. Strategies to reduce cost include the following:

  • Buy Used Equipment. Search local advertisements and auctions in your area, specifically looking for companies whose assets have been foreclosed. If in good condition, it's generally just as good as a new piece of machinery. With this in mind, you could save up to 80% without degrading capability.
  • Delay Product Upgrades Until Absolutely Necessary. Any software you use should have a focus on safety and security - that should come first for any business. But delay product upgrades and consider open-source software.
  • Barter Products For Supplies and Services. Have any suppliers who are also customers? They might be interested in a "trade" - each company receives all or a portion of its respective payments in the form of finished products. This agreement effectively provides a "discount" equal to the net profit margin on your product and allows for you to maintain cash that would otherwise be used. For income tax purposes, be sure to report the products you receive from your suppliers as gross income in year of receipt, while expensing the products or services you provide as a "cost of goods".

Final Thoughts

There are usually two principles small business owners learn early in the life of their companies. The Golden Rule - "He who has the gold makes the rules" - anyone who's gone hat-in-hand to a lender will know this. And "Cash is king" - the importance of cash in any company. Building and maintaining an adequate stockpile of cash provides maximum leverage and flexibility to any business, while enabling its owner to sleep soundly at night.

If you’re looking for some tailored advice to benefit your specific financial circumstances, then why not contact one of our friendly team members and arrange a meeting.

Contact reception@finance365.com.au or call (08) 6200 0269 today. 

 

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