The ancient Roman curse of ‘The Ides of March’ might have been the origin of tax collectors around the globe choosing the end of March to grasp what you thought was yours. But let’s distort it somewhat to the ‘Ideals of March’, simply because every owner manager worth his or her salt has finally got the beach sand out of the toes and a year of opportunity beckons.
And if you adopt the ‘ideals’ concept, it’s time to look at a textbook running of your business this year, onwards – while ensuring you do close off your books with some money in to satisfy the IRD.
So we’ve rounded up a number of gurus to give you some ‘do’s and don’ts’ while you package together a set of ideals to carry you on to glorious financial success this calendar and financial year.
Since there is no doubt at all that ‘cashflow’ is on the top of all business owners’ lists, I thought we should check it out with ‘Cashflow for Dummies’, which advises: “You should think of cashflow as the lifeblood of your business, and you must keep that blood circulating at all times, in order to avoid failure. Managing cashflows is essential to the successful operation of your business.”
Fred Ohlsson, Retail and Business Banking MD for ANZ, New Zealand’s largest business lender, points to an infographic ANZ has produced to visually present information on this subject quickly and clearly. This features a penny farthing cycle up against a slick matching set of wheels on a modern mountain bike racer, to help business owners understand how cash cycles can affect their business and their bottom line.
View it on their website and appreciate that the slow-turning, large wheel on the ancient cycle visually reminds you of your constant need to pay attention to your billing cycle, to follow up and limit the days’ credit you grant your creditors.
Protecting your cashflow
Businesses providing services are particularly vulnerable to cashflow crunches, especially if they follow the now almost mythical – lost-in-the-mists-of-time – Kiwi credit terms.
“Remember you aren’t your customers’ bank. Payment terms of the 20th of the month following are a ‘Kiwi idiosyncrasy’,” says Margaret Holmes, CA and director of The Engine Room. “In most countries, terms are more likely to be seven days.”
Her advice: Have clear terms and conditions stating what will happen if the invoice isn’t paid on time and enforce them.
Holmes has a helpful list of do/don’t strategies to protect your cashflow:
- Keep cash on the front page – Use a dashboard with pictures and alerts to keep you on top of your cash position, For example, Xero lets you see every day what you current cash position is.
- Build and use a financial plan – This lets you know when your cashflow crunches are going to happen, by letting you see where there is a mismatch between incoming cash and payment commitments. Review and update it regularly, based on actual performance.
- Make it easy for customers to pay – Provide your bank details on every invoice, and accept payment by credit card. This so much easier now for businesses, with both banks and telcos offering mobile solutions.
- Chase overdue debt promptly – There are great software solutions that start this process for you. If you are the only person available to get on the phone you can contract out this task to affordable solutions.
- Review costs – It is easy to say ‘yes’ to every great new idea, but how long is it since you had a good look at what you are paying for? Do you need all those phone lines? Are you subscribed to things you never use? Regular management accounts are a great way to keep an eye on this.
- Review pricing and margins – Are you actually charging enough? If your gross profit doesn’t cover your overheads, pricing may be an issue.
- Review business debt levels – Reducing debt over time is always good, but you should only be paying for the debt you need. Overdrafts are designed to cover the peak finance needs, not permanent funding. Long-term assets should be funded by long-term debt.
- Review stock levels – Businesses often have a lot of their money tied up in stock on their shelves. There’s no point having stock sitting around becoming obsolete, it is better to cash it up at lower margin or even cost.
- Negotiate payment terms with suppliers – Your customers do it to you. If you can negotiate terms where you pay for goods, after they are sold, half your funding worries are sorted.
“One of the most difficult jobs for an owner of an SME is managing cashflow – remembering to get the invoicing done and collect the money,” says Holmes. “Most business owners find external financing can be difficult to get and expensive. Fortunately there are lots of technology solutions which enable you to understand your business finances, as well as keep an eye on stock and debtor management. Use them.”
Sally Newcombe, a senior RightWay Regional Partner based in Wellington, describes cash as ‘critical’. “The absence of cash has forced so many great businesses to falter. An owner will focus on being profitable and forget to be relentlessly disciplined about cash. If you’re growing at a rate of knots then you will need even more working capital to pay your growing outgoings, not less.
Newcombe says you have to decide:
a. Are you a business or a bank? Every day your customers owe you money means that you are funding their operations, and your own!
Get your terms of trade reviewed by a lawyer. Don’t be afraid to ask for shorter terms. Or better, tweak your business model so you’re paid in advance or during the work carried out. Make your terms transparent and signed. This will protect you.
Deal with bad debts quickly and consistently. Follow through with warnings issued. If you personally nurture the relationship with your customers, it is a good idea to use a different ‘bad guy’ to chase up late payments. There are great third party tools available, from cloud applications that issue
automatic email reminders to debt collectors who
are remarkably successful.
She says you need:
b. Slick, simple debtor management.
Use good tools to record things like time and purchases – this way your staff can populate the information required for invoices in a timely fashion and it saves you the hassle. There are great cloud applications available for this.
Issue invoices by email. They’re instant and save you stamps (and trees). Invoice immediately and write detailed descriptions to avoid confusion. Make it easy for your customers to pay you. Make sure you are looking at your aged receivables and cashflow reports so you have visibility as to who owes you what.
And you should:
c. Expect excellence from your suppliers and team.
Insist on bang for your buck. You are forking out hard-earned cash to pay expenses. Negotiate and review all costs to squeeze out any inefficiency or leakage.
Work hard to nurture your staff. Train them well. Empower them and encourage ownership. Create an amazing culture and they will want to work hard for you. Roster well so precious cash doesn’t pay staff to stand around.
Be proactive if you are struggling to pay bills, particularly the IRD. Discuss with your suppliers to salvage relations and use financing tools available for working capital if required.
d. Beat tax at its own game.
Tax is the consequence of being profitable and can significantly dent the bank balance! Obtaining timely information and good advice is an important investment. A top notch accountant will educate you on the great cloud solutions available; help you structure your affairs efficiently and save you from surprise tax bills.
“The ins and outs of tax,” suggests Newcombe, “warrants a separate discussion, but make sure you find an accountant, who speaks in plain language and ensures you understand your obligations.”
You might say that’s all very well, but what do I do if we have let our systems slip and simply cannot get the funds we need to turn to? Do we have any options other than banks?
“Choosing the correct funding for SMEs, or any business for that matter, is fundamental to its well-being and contribution to the New Zealand economy, the respective SME owners, and Kiwis as potential stake holders in the wider term,” says Terry Haydon, director, Cashflow Funding (CFF).
“At present there is confusion and what appears to be little understanding of the differing funding opportunities available to assist businesses, as they progress though the business cycle from start up to maturity.
“Mainly, this is due to the bundling of and misuse/allocation of owner and/or business assets to procure the funds, as-and-when needed, to assist the business though its start-up, development stages and growth cycles,” says Haydon. “For example, the major working-capital providers, predominantly the commercial trading banks, rely on property collateral to secure a working capital facility, when this form of security should be used to fund seed or additional term capital.
“As the banks do not take into account the security value of current assets, they are inclined to consider non-property-secured working-capital advances as basically unsecured and charge interest rates accordingly.
“The full effects of these rates are hidden by the fact that the line fee is not openly shown in any rate comparison and the all-up interest rate is rarely under 14 percent per annum, sometimes up to 17 percent per annum. Our CFF calculator, as endorsed by Interest.co.nz, demonstrates the considerable savings that CFF can offer (between 3.5 percent per annum and five percent) as well as increasing lending limits.
“The approach taken by the banks,” Haydon says, “is totally at odds with the definition of working capital and ignores the fundamental reasons for it and, indeed, the method of payback and the 60-to-90-day lend and repay cycle. It is this short-term cycle and the cost of 90-day money, as compared to longer-term funding, that gives CFF a competitive advantage when pricing its funding loans compared to the banks.”
CFF executive Simon Thompson sums it up: “Technology and changes in legislation, particularly the Personal Property Securities Act 1999, have allowed us to develop and launch a true working capital overdraft that utilises a client’s current assets (stock, debtors, work-in-progress) as the prime security. Our facility considers a client’s internal systems (trading terms, etc) and rewards well-managed businesses with the best rates going.
“Bottom line – we offer well-managed businesses a greater level of funding at a lower rate than that of the banks, secured by the client’s current assets,”
Technology speeds payment
New technology is coming to the aid of business cashflow management too. Businesses can now get paid on the go, without the hassle and delay involved in invoicing and awaiting payment, says ANZ’s Ohlsson, referring to the bank’s FastPay app.
“Businesses want to spend their time making money, not chasing payment. We’re delighted we can offer them this simple and highly-competitive solution enabling them to get paid on the job.
“This app is a real game-changer which makes getting paid quicker and easier for a wide range of businesses – from plumbers and builders to mobile dog groomers. No longer does anyone have to chase unpaid invoices when they can take payments on the go,” Ohlsson says.
The ANZ app is available, free, on both iPhone/iPad or Android smartphone and enables SMEs to conveniently complete Visa and Mastercard credit and debit card transactions anytime, anywhere. Importantly, FastPay allows businesses the flexibility to use the app for any period of time without being tied into a long-term contract.
According to Ohlsson, rates are “highly competitive”, with no set-up fee and a low monthly merchant fee of three percent per transaction (minimum $15 per month). Receipts are sent directly to customers and multiple users can process sales into one ANZ business account.
FastPay follows other mobile apps from ANZ, including goMoney, which now incorporates several new features, and Transactive Mobile apps. The latter allows commercial customers to remotely monitor real-time account balances; view transactions; approve and release payments; and obtain dynamic FX rates.
›› Kevin Kevany is an Auckland-based freelance writer. Email [email protected]