In Small Business, Cash Flow is KING so it is extremely important to understand and manage your Cash Flow effectively and efficiently. Many Small Business Owners go into business undercapitalised and eventually run out of money and go broke as a result of poor Cash Flow Management. I find that this can be extremely prevalent in the Trades and Service Industries as the problem is also compounded by a lack of discipline concerning credit terms and collecting monies owed in a timely manner. So here are a few of my top tips to assist you with managing your Cash Flow in your small business…
Tip 1 – UNDERSTAND your Financials…
It is important in any small business to monitor and understand your Key Financial Indicators and manage your business accordingly. Cash Flow is critical to your business so it is important to understand the Cash Flow Cycles that impact on your business, and take action in advance should an undesirable situation be looming. For example if your business is Seasonal, you need to understand the pattern and allow for the down times by putting aside sufficient funds when sales and profits are good. You should also work closely with a GOOD Accountant on at least a quarterly, and preferably a monthly basis to make the right decisions. The money will be well spent if they are doing their job properly.
Tip 2 – Your CREDIT Terms & Collecting Money…
I encourage my clients to implement the tightest terms of credit possible within their business and industry. It’s no use making the sale if you don’t get paid and often extended terms lead to bad debts, and bad debts can lead to bankruptcy especially if you have tight margins. Often with the right implementation strategies it is possible to tighten up terms quite considerably
For Example… Ask for payment up front at least for the materials component of the sale. A Credit Card Authority will ensure that you will get paid even if it does cost a few dollars. Ensure that the terms your client signs when accepting your quote gives you a solid legal right to being paid, our, and if you do have to offer credit try for 7 to 14 day terms at worst and see how you go. In this day of modern technology we can verify deliveries and transfer funds in a matter of minutes, and no longer need weeks to correspond by mail and arrange and post cheques. Don’t let your customers use you as an Overdraft Facility! Chase ALL overdue accounts promptly and ruthlessly!!!.
Tip 3 – Managing Your Stock, Products and Services…
If your sales fluctuate regularly due to monthly or seasonal demands such as Agriculture, Air Conditioning or Heating, you need to find ways of smoothing out these fluctuations. For example you could bring in a product or service that is in demand in your off season. For example a Landscape Supply client of min now sells and delivers Fire Wood in the cold months when people don’t want to do gardening, and an Air Conditioning client offers maintenance programs outside of the peak demand months, and Gas Heating in winter.
With regard to stock, you need to rationalise the products you hold so that you only invest in products that turn over regularly. This avoids having precious funds tied up in stagnant product which deteriorates on your shelf and may become unsaleable. It’s also a good idea to investigate what products can be bought in bulk for a reasonable saving provided it can be resold in a reasonable timeframe, and funds from dead stock can be redirected to these more profitable lines.
Tip 4 – Your Overheads and Staffing…
As a general rule in my experience it is a great idea to reduce your fixed overheads in your business and go for Variable Costs where ever possible. The problem with fixed costs is that they need to be paid every month regardless of your income levels, so if you have a quiet month or go into your off-season, the bills still needs to be paid, resulting in many sleepless nights and possibly radical decisions you wish you didn’t need to make. A much better solution is to take on variable costs wherever possible so that they can be factored into your quotes and profit margins and only need to be paid for when funds are available. For example, many of my clients run a core employee complement that they know will be kept busy all the time, then they supplement these people with Sub-Contractors for job specific overload periods. Other examples are hiring equipment and on charging the costs when its usage levels or charge out rates in the business can’t guarantee that it will pay for itself by way of Lease of HP.
Kind Regards,
Andrew Pride, Principle – Smart-Biz Coaching and Consulting
If you would like to discuss this topic or any other areas of your business with me call 0412 895 599 during business hours or visit www.business-advice.com.au for more information.
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