A beginner’s guide to cashflow management

It’s the stuff of nightmares for business beginners: customers not paying on time; never enough cash in the bank; unexpected tax bills. Where does it end? 

To help you sleep easier, NZBusiness presents a short guide on cashflow management.

We’ve all heard the clichés about how ‘cash is king’; how cashflow is ‘the lifeblood of your business’; and how ‘without cash, profits are meaningless’.

They’re all true of course – they’re based on real-world business experience. So why do so many business owners struggle with cashflow, even when running a seemingly profitable business?

Put simply, by GoFi8ure executive director Lisa Martin, “you have to analyse and manage cashflow in order to control it”.

Of course, as any builder or trades person in business will tell you – being paid on time is a real issue for New Zealand’s small businesses. Xero’s New Zealand country manager Craig Hudson says a recent look at aggregated data on Xero for business payments found that more than 7.5 million invoices were overdue for Kiwi businesses in the previous six months – which represents $1.7 billion dollars’ worth of overdue invoices. So it’s a major problem.

“Negative cashflow stifles any business,” says Hudson. He believes there needs to be more help for small businesses to help them to thrive and remain afloat, and is calling on big businesses to recognise  the impact their late payments have on the small business economy.

“Equally important would be to do away with unnecessarily long payment terms.”

Hudson encourages small businesses to use technology that can help them track their finances and get paid faster. From online invoicing to a digital directory of business advisors, explore a collection of affordable solutions to help you get paid faster than ever, he suggests. 

“And consider adding popular payment options like PayPal, BPAY and mobile payments.”

He offers five strategies for strengthening your cashflow performance. They are:

• Invoice immediately. As soon as the work is complete. Being timely with your invoices is one way to get paid quicker. The practice of invoicing on the 20th is a corporate hangover from the past. You may also be able to use a mobile EFTPOS terminal; or for greater convenience and to save time, use a mobile app to receive payment.
• Track and manage contracts to the hour. Workflow Max helps businesses track job costs and manage contractors to deliver a contract on time and on budget.
• Negotiate your payment time. Setting a payment deadline is critical. But don’t draw it out. If your trading terms are 60 days, experiment with bringing it down to 30 days.
• Keep on top of late payers. Send an automated message reminder to customers who miss their due date. It’s one way to gently remind your client there’s an outstanding bill.
• Employ an expert. Get sound advice on improving your accounting processes and systems to automate debtor management and financial reports – so you can keep a closer eye on your cash.

Keep more cash in your business

As stated previously, cashflow is the lifeblood of any business. Everyone knows that.

However, says Sarah Lochead-MacMillan, business development manager at Lock Finance, profit doesn’t always equal cash.

“So we need to ensure we keep the cash in the business as long as we can,” she says, and below is her ten-step plan for doing just that.

1.
Chase your debtors. The squeaky wheel always gets paid; if you aren’t asking for your money you won’t get it. Have a system in place to regularly chase your debtors. 

2.
Give shorter credit terms. Check your terms of trade. Why not state seven days? Then start chasing. You will get paid faster.

3.
Use your credit card. ONLY if you pay it off each month. However, it gives you 45 days interest-free use of money; a way of extending your cash in the bank and paying suppliers on time.

4.
Use surplus cash to reduce debt. Today the credit interest doesn’t even begin to earn you as much money as you are paying on borrowing interest. So save the interest costs.

5.
Options for payment. Give your debtors multiple options to pay you: deposits, up front, credit card, online banking, PayPal, as well as credit terms. This way when you ask for the money there are several ways they can give it to you and PAY you.

6.
Review your expenses at least annually. Are you paying too much for your phone? Your mobile? Your Internet? Your power? Your fuel? With more services in the marketplace and things becoming competitive, prices are dropping. You could currently be paying more than you need to.

7.
Review your automatic payments and direct debits. Are they all still for things you currently use? Do you subscribe to things you don’t read or attend? Sometimes we forget and the payments run much longer than was intended. Check this on your credit cards too, which is where automatic payments are often set up.

8.
Do you need to buy that asset? Review what you want to buy and why and how it would be used. Often by leasing or hire-purchase there is a much smaller monthly payment that can be managed (and tax deductible) rather than one huge lump sum.

9.
Do not offer extended credit. Your terms of payment are YOUR terms. Do not feel embarrassed saying no to extended credit, by collecting debts when they are due and by chasing debts or even sending them to professional collectors. If you manage to recover a debt please have the courage to not do business with that debtor again. 

10.
Review your financing. Just as your expenses need reviewing so does your banking and financing. Do your facilities meet your needs? When did you last review the fees and charges? What other products could better service your business?

“Whilst we are talking about keeping cash in the business, always consider the ‘value’ versus the ‘price’,” says Lochead-MacMillan. “Cheaper today is not always cheaper in the long term, so you could sacrifice long term profit for a one or two month gain.

“Oh, and tip number 11? Review your prices. When was the last time you put your prices up?”

Debtor and invoice financing

To best illustrate how debtor finance can be utilised to finance a business through a growth phase, Lock Finance’s Lochead-MacMillan cites the case of a customer who started a service business catering to large health-care institutions.

“The client provides trained staff to perform services that the institution would otherwise have to hire employees to perform; a turnkey service to help improve service levels while, at the same time, saving the institution money.

“After they secured the first contract, they began the process of recruiting, interviewing, hiring, creating an extensive training program, training, etcetera. This took about three months to complete,” says Lochead-MacMillan.

“After the team was trained, they began providing the service, and sent their invoice to the institution after the first month. 

“Then, a couple months later they got a really big surprise. It turns out this institution held invoices from suppliers for at least 90 days before they paid them. In fact, it was somewhat of an industry practice.”  

Almost seven months into the business contract, the business had not even collected the first dollar of revenue, says Lochead-MacMillan. “The business had been spending money all this time not realising there would be this huge delay in actually collecting the money.”

So instead of running out of cash and failing, Lock Finance was able to provide funding against the business’s debtors with a confidential facility. 

“This allowed the company to continue to trade and grow whilst maintaining a cashflow of days not months,” says Lochead-MacMillan. 

“This cash flowing through the business meant the difference between a successful growing business or liquidation of a failure.”

Healthy cashflow practice

Of course, business owners get so tied up running their business that they can forget some of the most basic practices for staying on top of cashflow. 

Di Crawford-Errington, owner of Whangarei’s Ontrack Bookkeeping and president of the New Zealand Bookkeepers Association, says cashflow forecasting is vital. 

“If you know what income and expenses are due, you can prepare for the peaks and troughs, and avoid glitches,” she says.

Having business bank accounts for each of your businesses is also important. “Separating your personal and business accounts is essential. You would be amazed at how many start-ups don’t do this. This causes a cashflow mess and is expensive to clean up.”

Don’t forget regular stock-takes either. Crawford-Errington says clearing unwanted stock will make a difference. “Don’t let it sit idle; either sell or return it.”

Also on her list is knowing your breakeven point and focusing on your cashflow, not your profits.

“Know how much you need to earn to cover your fixed costs and your profit will take care of itself.”

For some final advice on healthy cashflow practice, we went back to GoFi8ure’s Lisa Martin.

Out of control staff costs can be a major business killer. “Every staff member should return cashflow on their employer’s investment,” she says. “For example, in the professional services arena, if your staff costs $50k per annum their revenue return in fees should be a x3 minimum – so $150k per annum.”

Understanding percentage margins, ratios and key indicators is a must in any business as well,” adds Martin, “to then be able to measure and manage revenue vs gross margin vs net profit.

“Training goes a long way here; people always ask what to do, but don’t plan it appropriately until it’s too late.”  

And one final piece of advice. “Adopt some discipline about spending money,” Martin says.

“You don’t have to use your EFTPOS card 17 times a day – that’s just gratuitous.

Respect money and it should come back to you in droves!”