You have probably heard the famous saying, “Turnover is Vanity, Profit is Sanity, Cash is King.” I want you to think for a moment about each of these very important aspects of your business.
How is your turnover going?
How is your profit going?
How is your cashflow going?
Are you monitoring these things at least monthly or even better weekly?
Today I am going to share with you some tips on how to improve your cash flow and how to start taking a more proactive approach to this part of your business.
For those just starting a business the way “the way you start will be the way you finish” so get into good habits at the very beginning. For those that have been in business for some time, now is a great time to revisit your current practices and make some positive, strategic changes in this area of your business.
Here are my six top tips for improving your cash flow.
1. Be clear on your PAYMENT TERMS
This is your business so you get to make the rules! You don’t have to do what everyone else is doing. Sure you can use this as a guide but I want you to think what is going to work best for you. Are you going to ask for immediate payment on the day of consultation? Are you going to ask for a deposit before your start any work? Are you going to provide an account?
Once you are very clear on your payment terms, it is important to communicate this with your clients or customers so they are aware of your expectations. e.g. if you want payment on the day of consultation, communicate the cost of your service beforehand and how the client can pay. EFTPOS facilities or a solution offered by your accounting software provider are very affordable these days.
2. Prepare your INVOICES REGULARLY and PROMPTLY
What is your system for preparing invoices? In business, we wear many hats and unfortunately it is usually the paperwork that we put off doing. This can have an extremely negative impact on your cash flow and will undoubtedly contribute to stress.
Accounting software packages like MYOB Essentials allow you to invoice from your smart device so you can invoice immediately. This means you don’t have to find time at the end of the day, end of the week, end of the month or at weekends – and it usually means you get paid quicker!
3. Be PROACTIVE in following up late payers
If you can’t request payment on the day, it’s important to be very vigilant in keeping a close eye on how quickly your invoices are getting paid. Ensure you have a procedure on how to deal with overdue accounts and stick to it.
You might like to send an email or text reminder a couple of days after the due date and then have a series of follow-up communication.
Don’t be afraid to stop supply of your goods or services if you’re awaiting payment, but make sure you communicate this to clients. Better still, have it in your terms so you can refer back to.
Your accounting software’s dashboard will be able to give you a snapshot of who still owes you money, so make sure you check this daily.
4. Have a BUDGET
Prepare an annual budget for your income and expenses and break this down into weekly and monthly targets. If you know what income you need to make to cover your costs or to make a certain level of profit, it’s more likely that you will hit this target.
To start with, make a list of all the expenses you think you are going to incur for 12 months. If you are new to business, you can make estimates. If you have been in business for some time and are using accounting software (which I recommend to all of my clients) then you can export to an excel spreadsheet all of your expenses for the previous year. I export the multi-period Profit & Loss and work through this line by line for each month and make changes as necessary. To this you can add a required level of profit. This is what you need to be invoicing to cover your expenses and to provide your required level of profit. If you are selling goods, you will have to apply your gross profit margin to this figure to arrive at your income target. Ideally your budget should be entered or imported into your accounting software too.
You may need to get some assistance with this step from your accountant or bookkeeper to get you started. Once you’ve been though the process, it will be a breeze is future years.
5. Monitor your results & COMPARE TO YOUR BUDGET
To be able to do this effectively you need to be committed to ensuring your accounting software is updated regularly. Set aside an hour or so in the first week of every month to check on how you went in the previous month, to reflect on your results and then to work out a plan for the current month. Did you have a shortfall in income the previous month that you can catch up this month? If you don’t know you were short, you will probably not realise that there is a problem until you discover that you don’t have enough cash to pay the bills that are falling due.
Make sure you’re using bank feeds so the income and expenses are automatically entered in your software (this occurs daily with some banks).
6. set aside money for your GST, TAX & SUPERANNUATION
You can have the best of systems and be running a very successful business. Even when paying all supplier bills on time, many businesses find that they haven’t set aside enough money for GST, PAYG withheld from staff wages, superannuation for staff and the business’s tax.
Some businesses know what these liabilities are and set aside these funds in a separate bank account; others choose to use these funds temporarily for cash flow and ensure they have replenished these funds by the due date. But unfortunately many business owners aren’t aware of what these liabilities are and spend the money – and it’s gone when it’s most needed!
It’s crucial that you can ascertain what your liabilities are at all times. Online accounting software like MYOB will keep track of GST, PAYG Payable and Superannuation Payable, however the business’s annual tax might be a bit trickier to calculate. Check with your accountant what you should be setting aside. Better still, ask how you can keep an eye on it during the year.
Please remember that you don’t have to do this alone:
Get your staff on board and have them assist you in enforcing your payment terms
Make sure you are using online accounting software in your business
Make sure you are getting the most out of your accounting software by keeping it updated daily and reviewing the reports and dashboards. This is easy enough to access on smart devices, too.
Work with your accountant to get clear on your current and future obligations.
There’s no reason you can’t become a king or queen of cash flow – today!