Cashflow is the lifeblood of all businesses, and often the number one cause of angst for business owners. So here are some tips and tools from the experts to help support a robust cashflow strategy.
by Glenn Baker
If you’re in business then chances are you’ve experienced a cashflow crisis to some degree over the years. It’s ‘part and parcel’ of running a business. Even successful and profitable businesses can run into cashflow challenges.
Cashflow management is a skill and discipline vital to the wellbeing of an enterprise – it is particularly important for new and growing businesses.
Fortunately, there are now a number of finance options you can take advantage of to help iron out any dips in cashflow. There’s also a lot of clever thinking out there to help you devise a cashflow plan for your business – or at least have a plan B in case you do suddenly get into strife.
Ian Kuperus, founder and director of Tax Management NZ, fully understands the importance of having a cashflow plan after successfully growing his home-based business from a single person operation to a 22-person firm in downtown Auckland.
“Business is complex and all parts are interrelated, but if you can, develop a good cashflow plan that leaves you free to focus on outworking the strategy,” suggests Kuperus. “Ignoring the cashflow plan and ‘hoping for the best’ leads to unplanned crises, which can absorb a lot of your time trying to correct. Worst-case scenario, this can completely derail a fledgling business.
“Someone in the start-up phase will face many uncertainties regarding future cashflow and would be well served to have a three, six and 12-month plan,” he adds. “This may have breakpoints and contingencies. For example, ‘if sales have not reached $10,000 per month by March 2017 we will draw down a family loan or reduce marketing expenditure’.
“Debtor or invoice finance can be a smart way to fund business growth; a particularly good solution for businesses that are turning away orders and forgoing growth opportunities they can’t fund.”
– Wayne Goss, Scottish Pacific Business Finance.
“For those beyond the start-up phase, a robust cashflow plan enables a business to maximise its growth potential.”
The saying ‘failing to plan is planning to fail’ is so applicable when dealing with cashflow, believes Kuperus. “Having said that, no plan is ever foolproof. It’s important to make the best cashflow plan you can and keep monitoring against it. This will help identify early warning signs of trends and give you the maximum time to adjust.
“Having a plan also makes it easier to obtain advice from others as it is very difficult to do so if it’s ‘all in your head’.”
Lisa Martin, executive director of specialist bookkeeping firm GoFi8ure, highlights a 2015 bank study that found 72 percent of businesses that fail do so due to cashflow issues.
“People need to remember that cashflow does not just relate to the amount of money that’s coming in and out. You also need to take into account the timing of when this actually happens.
“The last thing you want is for a big bill to go unpaid because you were not prepared for it,” she says. “For example; if you operate a business based on an invoicing system and your invoices are not paid until after your business expenses and loan payments are due, you might end up with serious cashflow problems and a bad credit rating!”
Martin agrees that the right forecasting and careful budget planning is imperative for businesses – particularly fast-growing ones. “Growing within your means leads to longevity and sustainability in the marketplace.”
Warning signs and mistakes
Overestimating sales and ignoring or downplaying negative sales trends are common warning signs that your business is having, or is about to have, cashflow issues. Courtesy of GoFi8ure, here are five more signs:
- You are unable to keep up with current expenses and bills are paid late.
- The directors are not able to take drawings or a salary.
- You have more expenses each month than income coming in.
- On paper you invoice out a lot each month, yet there is never any money in the bank.
- You are investing your money into things that are not contributing to business growth.
Wayne Goss, head of business development at Scottish Pacific Business Finance, also contributes these five red flags:
- Customers are slow to pay, keeping cash out of your business.
- Your business is putting off or can’t afford to pay tax obligations.
- Owners are regularly topping up the business using their own funds, or paying business expenses on personal credit cards.
- Your business has inadequate reporting systems, making it hard to know what’s going on.
- The business is turning away orders because it can’t fund them.
- NZBusiness also asked experts to identify some common mistakes business owners make that can often lead to cashflow difficulties. Lisa Martin provides the following:
- Failing to forecast – Some companies don’t forecast cashflow often or accurately enough; others don’t know where to start or how it all works. Not understanding the financial demands of your business could lead to a cashflow challenge that hinders growth. There are great software tools available that people may not even know about. For example, reporting tools like Spotlight Reporting can help give you the data you need to monitor your businesses finances.
- Slow invoicing or debt collecting – Invoicing clients on time will help your cashflow. To get good consistent money coming in, put sound procedures in place. For example: bill at the end of each job or month and have set, expected payment terms. There also needs to be a process in place for when clients do not pay on time and need following up. You could use a cloud add-on tool such as Debtor Daddy or Invoice Sherpa.
- Work smarter, not harder – Use a time tracking tool to record time spent on a job or project. Far too often business owners are writing off time spent on jobs because they didn’t record it properly or too much time was spent on the job itself. Having a cloud add-on like WorkflowMax, FlexiTime or Harvest will help you see where billable and unbillable time was spent.
- Stop spending money that’s not yours – If you are GST registered, that money is not yours to spend. Quite often, when in a tight spot, any savings for GST and tax tends to get dipped into and before you know it, tax time comes around and your kitty is low or dry. This puts extra, unnecessary pressure on you to produce money to cover the bills.
The biggest issue that Craig Brown, GM Lending at Lock Finance, can see when it comes to managing cashflow is poor governance of the business – poor decisions, not being prepared and not seeking the right advice in a timely manner.
“This [advice] can be from any number of people,” says Brown. “Other business owners and how they may have dealt with things, accountants or business advisors.
“Also, I see business owners too busy working in the business rather than working on the business.”
That last comment is a business fundamental. And so is Brown’s advice for staying out of trouble.
“Have a working capital facility that can be flexible enough to support times of growth or when trading may not be going as well as you would like. And ensure your documentation is robust – like terms of trade and internal systems, from accurate, timely invoicing through to proper collection activity.
“This is important as any subsequent disputes or collection activity can be dealt with quickly. As we all know, time is money,” he says.
Applying debtor finance
When it comes to getting on top of cashflow Craig Brown notes that bankers may only provide a facility to the level of the security available (more often than not the business owner’s property) not what the business may actually need to finance their working capital cycle.
“Therefore the business may be regularly asking for temporary excesses, which banks don’t like.”
Lock Finance facilities – including trade finance, working capital, debtor finance and factoring – can generally be on top of what the bank may offer, he says.
“This can alleviate undue stress on the owners and makes sure that their relationship with their bankers remains on
“Our facilities assist with growth and fund the businesses as they are now – not what outdated 2016 financial accounts may show.”
Brown cites one client whose sales reduced by 20 percent one year due to issues surrounding the main industry that they supported. This put a strain on their cashflow – they were struggling to keep up to date with some of their suppliers and the IRD. More time and additional funds was needed to support their cashflow requirements.
Within six months of taking up Lock Finance’s debtor finance facility, linked to the business’s debtors ledger, they picked up additional work and are now growing well.
Brown believes the new housing LVR regulations will make a business’s access to working capital more difficult.
“Most banks operate with a tiered business banking offering. Those businesses at the smaller end generally need to have their business borrowings secured by the equity in their owner’s property or properties. With the new restrictions this may make it harder for businesses to get additional funding if their security may be scaled back.
This could mean that the businesses actual assets such as their debtors book would need to be used as security to assist with the funding of working capital,” says Brown.
Scottish Pacific Business Finance is another specialist in the provision of debtor finance.
Wayne Goss describes it as “a form of invoice finance which is essentially a flexible line of credit secured by a business’s receivables”.
“This allows the business to access a proportion – typically up to 80 percent – of the value of their ongoing credit sales upfront, which provides them with a rapid cashflow injection as and when needed to meet their commitments.”
Goss says typically with this service Scottish Pacific also provide an additional credit control service involving issuing statements and reminding debtors about payments to ensure that there is discipline in managing receivables.
“An additional solution known as invoice discounting is a funding-only solution which is suited to more established businesses who capably manage their cashflow.”
Goss says debtor or invoice finance can be a smart way to fund business growth; a particularly good solution for businesses that are turning away orders and forgoing growth opportunities they can’t fund.
“This style of finance works best in industries such as temporary labour hire, transport, wholesale/distribution, recruitment, manufacturing, business services and printing. It is not suitable for building contractors, professional services firms and retailers,” he says.
“Debtor finance facilities are self-liquidating. Instead of taking on additional debt, an advance is offered on money that is already owed to the business.
“It’s a form of finance that provides access to working capital that would otherwise be tied up in receivables for 30 or 60 days, or more.”
Another cashflow trouble spot, Goss says, is a seasonal or ‘one-off’ issue with the business that owners have not planned for. Scottish Pacific offers Selective Invoice Finance for situations like this, where owners can pick and choose which invoices they would like funded, perhaps at certain times of the year to tide them over.
More cash in your future
There’s no one ‘magic bullet’ formula for getting your cashflow sorted – but there’re a number of things you can do to help get your cashflow forecast and plan working for you.
Lisa Martin’s suggestions include:
- Save for a rainy day – putting some extra funds away will relieve the pressure if something does come up. Also make sure you have enough money to get through the Christmas holidays.
- Compare your original plan to your current expenses. Was your original forecast correct? Are you meeting your targets? If not, modify your plan to match your current situation and desired outcome.
- Look at your accounting software to see if it can help. Some systems have budget sections to help you forecast over the next year.
- Seek advice! An expert accountant or bookkeeper can work out a budget with you. Alternatively, ask them to help prepare the budget on your behalf.
- Look at areas of your business where you can reduce spending. For example, are you posting invoices and/or correspondence? Email is widely used these days, so take advantage of this free service.
- Wayne Goss reminds us that without cashflow, growth can be significantly curtailed.
Strong cashflow delivers the pool of working capital which can be deployed to fund stock and other vital input, he says. If this pool is not sufficient, the business can’t finance new sales until older sales are fully liquidated (i.e. debtors pay the invoice
His best tips are to try to be paid promptly, and fund the business in a way that you can access money quickly and so that your facility increases as you grow.
Issue an invoice as soon as the job is done or goods are despatched, he says. Don’t wait until the end of the month.
Make sure invoices include all relevant details, such as the customer order reference, the date payment is due, your bank details, who to contact if there is a query and a full description of the goods or services provided.
“Make sure those responsible for any sales are not responsible for collecting payment,” warns Goss. “Have two distinct roles within your organisation where responsibilities are clear.”
Don't chase turnover, chase profit, he says, “and there's no profit in a sale unless you get paid”. Running regular credit checks will improve your likelihood of getting paid, and paid on time.
“It's important to get cashflow right because without good cashflow, it will be hard for the business to grow,” says Goss. “If there is cash in the business for growth, for paying suppliers and employees and for taking on new customers, the business owner will have a much less stressed existence!”GET PAID,ELIMINATE GUESSWORK
ONE OF THE BIGGEST drags on cashflow is the inability to get customers to pay what they owe you consistently. Direct debit payment solutions can be the answer, and there are many spin-off benefits, such as less cash handling, easier management of wages and operational costs, and time redirected to other management duties.
Direct debit payment solutions let clients run their inbound payments virtually on autopilot, says Ryan Brough, Ezidebit’s head of marketing. Businesses get paid on time, cashflow becomes constant, and all inbound payments are automatically reconciled.
“Any failed payments can be followed up automatically, again reducing manual administration to a bare minimum.
“Ultimately, it takes all the guesswork out of cashflow management.
“In terms of real benefits, businesses can reliably forecast their cashflow, ensuring they can adequately budget for operating and capital expenses.”
Businesses often fail to see that manual payment administration increases the cost of doing business, says Brough. “Implementing the right automated payment solution goes the distance in reducing time-consuming tasks for staff, chasing overdue payment and reconciliation.”
Ezidebit provides cloud payment solutions for more than 20,000 businesses across Australia, New Zealand and Hong Kong.
“We are the largest non-bank payments provider in Australia and our solutions are implemented widely across a range of industries including accounting, childcare, fitness, storage, software and enterprise businesses,” explains Brough. “We have proven expertise in navigating the complex payments landscape of regulated industries.”
He sees non-cash payments as the way of the future. “With Ezidebit’s recurring payment solution, businesses can confidently reduce bad debts, forecast better, and stay competitive.”