Advivo Business Advisors and Accountants share strategies to grow your business while creating more cash flow.
A business’s healthy cash flow is imperative to its success, especially for small to medium businesses. A business often needs to spend cash fulfilling orders before payment is received for these orders, so working capital is needed to fund the timing gap. When revenue is growing, this is exacerbated because more sales = more working capital needed, until customers pay for work done/product delivered. When a business has poor cash flow they can easily come to an immediate halt. You may find suppliers refusing to provide stock due to late payments and you can’t invest in your business growth. Essentially, a business will fail unless they can generate more cash flow.
Cash flow problems can even occur when your business looks profitable. This can be due to shorter supplier payment timeframes than customer payment timeframes or where the business has large irregular supplier or customer payments. These sort of cash flow problems are frequently seen when sales are growing.
Let’s look at some strategies to help grow your business while creating more cash flow:
- Do you educate your customers/clients about your payment terms, including what they need to pay upfront? Making this clear can prevent them from being tardy in paying you and can avoid confusion and disputes around the amount they should pay. Get this in writing and signed.
- Where possible, invoice and collect a part payment to start work (enough to cover what you’ll need to expend upfront).
- Make sure that whoever quotes for work is allowing sufficient margin in each job to cover direct job costs, plus a share of overheads, plus a reasonable profit margin. Jobs with no margin will kill cash flow and make no profit.
- Invoice as soon as possible after you’ve delivered what you’ve promised, ideally at the same time. Your customers’ best perception of what value you’ve given them is at time of delivery and so they are most likely to want to pay you quickly if they get the invoice promptly.
- Any good accounting system these days allows you to set up automated reminders when invoices are becoming due and overdue, so that your customers will already be aware that they need to pay you without you having to chase them.
- But still chase them promptly once they are overdue and continue to follow up non-payment!
- Plan ahead when anticipating growth and put in place funding solutions to cover the anticipated working capital gap. See our article on funding.
- Do your cash flow forecast and set aside funds in this for paying the lumpy payments we all too easily forget about – PAYG withholding, staff superannuation, GST.
- Check what basis you are paying GST on. Is it Cash or Accruals? If you’re on accruals you’re paying GST to the ATO before you have the money if someone hasn’t paid you. Small businesses up to $10m turnover are now able to be on a cash basis where previously this was capped at $2m. This is worth reviewing if your turnover is over $2m.
Follow these steps and enjoy nurturing your growing business!
Contact us today to speak with our team of experienced accountants and advisors to learn more about how we can help to grow your business while creating more cash flow.