Growth sounds like success, but it can strangle your cash flow if you’re not careful. You spend cash fulfilling orders before customers pay you. When revenue is growing, this timing gap gets worse because more sales equals more working capital tied up in debtors and inventory. Everyone is busy delivering all that extra work, then suddenly there’s a big bill that needs paying and the cash isn’t available.
The ATO doesn’t care that you’re owed $200,000 if you can’t pay your quarterly BAS. Your staff don’t care that revenue doubled if their super hasn’t been paid. Growth without cash flow management isn’t growth, it’s a crisis waiting to happen.
Make your payment terms crystal clear upfront. Educate customers on what they’ll pay and when before you start work. Get this in writing and signed. Clear terms prevent confusion, disputes, and tardy payments.
Where possible, invoice and collect full or part payment upfront. Get enough to cover what you’ll need to spend before receiving final payment. Customers who balk at reasonable payment terms often turn out to be problematic payers anyway.
Ensure whoever quotes for work is allowing sufficient margin in each job. Every job needs to cover direct costs, a share of overheads, and a reasonable profit margin. Jobs with no margin kill cash flow and make no profit.
Invoice as soon as you deliver what you’ve promised, ideally at the same time. Your customers’ perception of value is highest at this moment, so they’re most likely to pay quickly. Don’t invoice months after completing work. Your client won’t remember what you did, and it becomes a nightmare to collect.
Use your accounting system’s automated reminders for when invoices are becoming due, due, and overdue. Your customers will already be aware they need to pay without you having to chase them. But still chase them promptly once they are overdue. Being polite but persistent separates businesses that get paid from those that don’t.
Plan ahead when anticipating growth and put in place funding solutions to cover the working capital gap. Whether it’s an increased overdraft, debtor finance, or a business loan, arrange it before you need it. Banks are far more accommodating when you’re planning proactively rather than scrambling reactively.
Do your cash flow forecast and set aside funds for the lumpy payments that are too easily forgotten. PAYG withholding, staff superannuation, and GST all come due at specific times. If you haven’t provisioned for them monthly, they arrive as nasty surprises.
Check what basis you’re paying GST on. 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 $10 million turnover can now be on a cash basis, where previously this was capped at $2 million. The cash basis means you only pay GST once you’ve received payment, which can significantly improve cash flow timing.
Growth is exciting, but unmanaged growth creates problems faster than you can fix them. Follow these strategies and enjoy nurturing your expanding business rather than watching it consume itself. If you need help setting up proper cash flow forecasting or want to review your working capital strategy, contact the Advivo team.
