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7 Steps to better cashflow for start-up business

As a business owner there are few things more stressful than facing a mountain of month end bills with an empty bank account. 

Not having the cash to pay your bills, however, does not necessarily mean your business is doomed.

Most businesses at some point in their growth have experienced a cashflow squeeze.

The important thing to understand is what is causing it?

These 7 steps will help you diagnose your cashflow and show you how to improve it.

Step 1. Check if your business is profitable?

Do you know if your business is making a reasonable profit? Even the best cashflow management system will not fix a business that is fundamentally not sound or is not turning a profit.

Have a look at your product or service lines and work out their individual performance. Are there efficiencies that could be achieved? Look at saving time not just cutting costs. Is one product or service delivery area more profitable than another. Make sure the sales you are chasing are profitable.

 

Step 2. Get your accounts in order

To understand your cashflow, you need to understand the flow of money in and out of your business. You can use a spreadsheet to record this information, or for the price of a laksa each month, you can subscribe to Xero, Quickbooks, MYOB, or a range of other online financial management systems.

With a low-cost accounting software, you can easily track income and expenses. From anywhere in the world, at any point in time, you’ll know who owes you money and who you owe money to.

 

Step 3. Create a cashflow forecast.

A cashflow forecast is all about estimating how much cash you will have in your bank account at the end of each month. This information will help you plan for seasonality, time the purchase of big-ticket items, and keep a close eye on expenses.

Using an excel spreadsheet, enter your predictions of income and expenditure over the next twelve months. Include any larger payments you know will be coming up such as superannuation, tax payments, or bulk purchasing of materials.

At the end of each month, compare your actual cash in the bank with your forecasted amount. Investigate the reason for any big variances.


Step 4. Track your average debtor days

Improving cashflow has a lot to do with how quickly you get paid after you send an invoice. This is referred to as debtor days. 

You can calculate your average debtor days using this formula:

(Average accounts receivable/Annual total sales) x 365

You’ll want to track your debtor days so you measure the effectiveness of your cashflow improvement actions. Reducing debtor days is the aim of the game.

Step 5. Get money in quicker

Slow invoicing procedures can add delays to getting paid and put unnecessary pressure on your cashflow. Ensure you have tight credit procedures and are invoicing as soon as possible after a job is completed.

When offering credit, check references and offer credit terms for clients on a case-by-case basis.

For some clients you will have no choice but to offer 30-day payment terms, that doesn’t mean you have to extend 30-day payment terms to all your clients.

Consider payment terms of 14 days, 7 days or payment on completion depending on the client. This will reduce your risk and see money flowing into your bank account earlier rather than later.

Be accurate with invoices. Disputed invoices can cause delay in payments and re-issuing invoices, can reset the invoice payment terms.

Where appropriate, get deposits, upfront payments, or offer small discounts for early payment.

Set automatic email reminders to remind clients of unpaid bills that are due and have a system to follow up late payments.

 

Step 6. Use finance rather than cash for larger purchases

Using cash to buy assets or equipment can sometimes be an anchor on your business growth.

Getting a loan to finance new equipment or asset purchases will free up cashflow and the loan interest will be tax deductible.

 

Step 7. Get discounts from suppliers

When was the last time you negotiated prices with your regular suppliers?

Reducing expenses is a big part of improving cashflow issues.  Shop around for better deals on regular expenses. Consider opening credit accounts with suppliers to take advantage of commercial or trade discounts.

The BEC NT Business Advisors are here to help, so get in touch if you would like to discuss applying these cashflow strategies in your business.

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