Paymate Blog Avoiding the Cashflow Crunch | | Print | |
Managing Cashflow – Avoid the Crunch!
Ask any small business owner what their No 1 challenge is and it’s usually – cashflow or the lack of it! Getting paid quickly by customers and being able to pay suppliers on time is often a tricky juggling act, especially when you are starting up or growing fast. Lack of cash, not lack of sales, is often cited as a common reason for new businesses to go bust, leaving owners with losses or a large debt to repay. Most suppliers will not sell on credit when you are small or without a track record, and customers might pay 5, 10 or even 30 days after purchase in some industries. Chasing slow payers or bad debt can be a frustrating exercise, leaving you without funds to purchase your next shipment of goods or pay employees.
Here are five simple tips and tricks to help you avoid bleeding cash and grow your business with some confidence.
1. Plan ahead 2. Set up payment terms and options 3. Sell and bill online 4. Fund the cash shortfall 5. Manage your cashflow 1. Plan ahead Sounds simple enough, but jotting down expected bills you will need to pay in the next three months is an essential start. You can use a calculator or Excel spreadsheet to help work this out quickly. Then estimate sales over the same period, but more importantly, when you can expect to get paid by customers. The difference in timing will show you the shortfall or surplus every month. You will need to fund the shortfall (see Tip No 4) yourself, even if for a short time or and sometimes when sales are growing fast. Don’t forget GST and tax payments to the Tax Office. Final point: this cashflow forecast is useless unless you update it - weekly, if required - and manage accordingly. 2. Set up Payment Terms and Options You have to be clear about payment terms with your customers, ie when do they need to pay for your goods or services – prior to delivery, on delivery, 10 days later or on a set date? Making this clear before the sale is essential and if you are extending credit a formal invoice with the payment date and penalties for late payment are important. You do not have to always extend credit – if you accept credit card payments the customer gets this benefit and you get paid immediately, though there is a fee. Accepting direct credits to your bank account is another fast way to get paid – so provide your bank details on your invoice or website. Finally, agree favourable terms with your own suppliers in advance, not when you are short of cash. 3. Sell and Bill Online If you can, let customers order your products or services online, i.e. on a website or even a one-page site with product and price details. Offer an online credit card payment option and ask for orders to be confirmed with a credit card payment. Customers are now buying more and more online and are comfortable with paying before they receive the goods – just make sure you use a trusted third-party brand to accept payments, so that customers feel confident about providing their credit card details online. If you do not have a website or take orders over the phone or at a shop, you can also send an electronic invoice or simply send an email asking for credit card payment via a third party payment provider. Getting paid online is the fastest, safest way to get cash into your bank account and avoid a cash crunch. 4. Fund the Cash Shortfall Most businesses will face a cash shortfall at some stage of their growth, so it is best to fund this in the most cost-effective way. You should get financial advice on your options. Equity is the cheapest funding option, since you pay no interest and do not have to give the money back, but obviously you will have to give up some share in your company. A longer term bank loan is useful for higher cash requirements especially if you have to hold stock for seasonal sales and you will need to build these interest costs into your sale price. Short term overdrafts can be expensive, but are a last resort. You can also ‘sell’ your invoices to your bank (called Invoice Discounting) to get cash immediately when you have offered 30 or 60 day terms to your customers. Maintain a good relationship with your bankers, especially before you need them! 5. Manage your cashflow Finally, you need to set aside some time every week to look at your bank balance and cashflow outlook. Chase up the slow payers quickly – again, offering online payment options and credit cards can overcome excuses. Lose the chronic late payers – sounds brutal, but they are a drain on your cashflow, can increase costs and hence lower profits. You can also use a collection agency to follow up late or non-payers, though some costs will be involved. Useful links:
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