How to Grow Your Business Without Murdering Its Cash Flow
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.Everyone is busy focusing on getting all of that extra work done, then suddenly there’s a big bill that needs to be paid (often the ATO) and there isn’t cash available to make the payment because it’s all tied up in debtors or inventory.
Strategies To Grow Your Business
Let’s look at some things that can be done in advance, when planning for growth, to avoid this scenario:
- Do you educate your customers/clients in what your terms around what they will pay you and when upfront? Making this clear can prevent them from being tardy in paying you and can avoid confusion about their being overdue and disputed around the amount they should pay. Get this in writing and signed.
- Where possible, invoice and collect full or part payment (enough to cover what you’ll need to expend upfront before receiving final payment).
- 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 this time and so they are most likely to want to pay you quickly if they get the invoice then.
- Don’t be invoicing months after you did the work! Your client won’t remember what you did, why, or even that you did anything and it will be a pain to collect.
- Any good accounting system these days allows you to set up automated reminders when invoices are becoming due, 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.