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Many business owners have their hands full juggling staff, customers, and invoices so it can be easy to drop the ball when it comes to monitoring cash flow. Ironically, it's efficient cash flow and sufficient working capital that is central to the survival of most small and medium-sized businesses. Good cash flow allows business owners to take advantage of opportunities that come their way while at the same time providing a buffer in more challenging financial times. |
Monitoring cash flow and working capital is about tracking the total cash coming in and going out of a business and there is evidence to show more than 80 per cent of businesses are likely to fail due to cash flow and working capital pressures rather than poor sales.
These pressures can be the result of businesses failing to manage their costs and collect enough cash in a timely manner to meet ongoing commitments. In March this year, national credit reporting agency Dun & Bradstreet found the average period for late payments between businesses had blown out to more than 54 days*.
This was longer than the average late payment period during the height of the global financial crisis.
These figures are particularly worrying when viewed alongside CPA Australia's most recent Small Business Survey** which revealed that 41 per cent of respondents weren't preparing cash flow forecasts and 25 per cent weren't chasing up late payments. The survey found many Australian business owners weren't doing enough to monitor cash flow and working capital and were therefore unlikely to be aware of any potential problems or pressures looming.
The good news is there are a number of simple strategies businesses can employ to help them remain flexible and better prepared for any potential cash pressures.
The best way to start is by reviewing your cash flow and working capital now and setting aside a time to do this each month. As part of the review prepare a budget that includes a cash flow and working capital projection for the year ahead. This will allow you to see whether you have enough cash in your business to keep it going or whether new sources of cash need to be found. Your accountant will be able to help you develop an accurate cash flow plan.
The next step is to take advantage of high deposit rates particularly on money set aside for BAS, staff superannuation and even the dollars inside the petty cash tin. Use a business credit card, with lengthy interest free periods, for small petty cash purchases and earn interest on your cash by depositing it in a bank instead.
Consider offering clients a variety of payment methods including BPay, direct credit, credit cards or EFTPOS. If your business is mobile, consider using a mobile credit card/EFTPOS terminal to accept payments.
It's also important that your invoices are clearly marked with payment options and the account details of your business. By making the payment of bills as simple and easy as possible you're more likely to achieve a better and faster return on money owed.
If you offer payment terms, it's important to develop appropriate terms of trade (an agreement signed by your customer) and credit check all new customers rather than assume they are credit worthy. Also put in place a consistent debt collection process - faster debt collection brings improved cash flow which translates into more working capital for your business. Elements of an effective debt collection process include, setting credit limits for each customer, being able to identifying overdue payments, and routinely following up late payers.
Offering discounts for payments received within the usual 30 days or large discounts for payments received within seven days may also be a useful strategy. When it comes to your own finances however hold off paying your own bills until the end of the payment period unless discounts are offered and you're able to take advantage of them. This will help to encourage a healthy long-term cash flow.
It may also help to map out the best times to make capital and non-essential expenditures. Ideally, you should avoid making big capital purchases when your cash flow is under pressure.
Regularly review your assets, identifying any underused assets to determine if you are better off selling the item and instead hiring one when you need it.
Another method to improve your working capital is to evaluate your inventory regularly - excess stock ties up funds that could be more productively used elsewhere in your business. A key indicator to monitor and improve is your stock turnover rate, calculated as dividing your cost of goods sold, by your average inventory at cost.
Last, but not least, keep an open relationship with your bank. By seeking expert help you may be able to identify solutions to potential problems and improve the chances of your business surviving any rough financial periods.
*Figures based on Dun & Bradstreet's business-to-business trade payments figures released in April 2010.
** The CPA Australia Small business survey was conducted in May 2008. It comprised a nationwide sample of 500 small businesses (up to 20 staff) and 200 CPA Australia members in public practice with small businesses
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