How to improve cash flow by avoiding 6 common mistakes
Good cash flow management has never been more important. Avoiding these six common mistakes could help improve your cash flow now and in the future.
Good cash flow management doesn’t just happen, it’s the result of a successful strategy. Cash flow management strategies should assess your accounts receivable and accounts payable workflows to identify any potential bottlenecks that might create a gap in your cash flow.
For example, if you offer your clients 30-day payment terms but many of your suppliers expect payment within seven days, you may create a negative overlap in income versus costs that could derail your cash flow. Paying bills earlier than you need to will increase the overlap. Offering your clients an incentive for early payment may reduce it.
Does your income fluctuate throughout the year? Do you have larger bills to pay in certain months? Is there a cash flow forecast in your business plan?
Businesses that experience an influx of work at certain times of the year could benefit from a regular cash flow analysis. This could help identify when income is likely to be at its highest and when you expect it to be at its lowest. As a result, you may be able to better plan when you need to control costs to protect your cash flow and when it makes sense to invest in business growth.
In addition to helping you foresee cash flow problems, regular analysis may also help you identify ways to reduce costs and increase profit margins.
Whether you choose to invoice for work or get paid on the spot, a good way to increase cash flow is to make it easy for customers to pay you. So, think about how they can pay you the way they want to.
That could be by transferring funds using the BSB and account number of your business bank accounts. Or, if you'd prefer not to share your account details, ask to be paid by PayID® meaning you just need to provide customers with the unique number you've registered for the service, which could be your phone number or ABN. Or offer BPAY® if the scale of your business merits registration.
Failing to stay on top of overdue payments can significantly hurt your cash flow. Set out your payment terms in all client contracts or service agreements, and ensure due dates and (potentially) late payment fees are clearly detailed on your invoices. Consider using accounting or payroll software to send automatic reminders when an account falls overdue.
You might also want to think about implementing a set schedule of follow-up reminders and final notices. A debt recovery plan you can turn to when a final notice is not fulfilled may also be useful. Alternatively, you could engage a debt collection agency if you don’t want to manage it in-house.
Large jobs can be excellent for your business, but extended payment terms, including waiting until the completion of a major project to be paid, can wield a heavy blow on your cash flow. It can be helpful to set a series of milestone payments to keep the cash coming in throughout the term of the project.
You could try to link milestone payments to specific deliverables so your client can see the value; and develop a plan for how you’ll handle late payments. For example, does a late milestone payment trigger a freeze on the project? This may help you to avoid making ongoing commitments to a client that’s not paying you on time.
It can be tempting to splash some cash on that shiny new equipment, but all major purchases you make should be carefully planned as part of your cash flow management strategy. Likewise, any new hires should only be made as part of your long-term recruitment strategy that takes your cash flow into account, as wages are part of a business’s main expense.
It could simply be a matter of waiting until the right time of year to purchase new equipment, such as during end of financial year sales. On the hiring front, many business owners feel it's a good idea to bring on new employees on a casual or freelance basis first. This could help protect your cash flow if that big new client relationship doesn’t work out as planned.
To sum up
Cash is like oxygen for your business. Supporting its flow can increase your space to breathe – but without it your business may risk suffocating. That’s why it’s important not to leave cash flow management to chance.
Get it right and you may be in a position to invest surplus cash in a savings account for future needs. Or, if you have cash flow issues and need some short-term assistance with covering operating expenses, you could think about a business loan or overdraft facility.
This information does not take into account your personal circumstances and is general. It is an overview only and should not be considered a comprehensive statement on any matter or relied upon. Consider obtaining personalised advice from a professional financial adviser and your accountant before making any financial decisions in relation to the matters discussed in this article, including when considering tax and finance options for your business. Westpac does not endorse any of the external providers referred to in this article.
BPAY® is a registered trademark of BPAY Pty Ltd ABN 69 079 137 518.
PayID® is a registered trademark of NPP Australia Limited.