The vast majority of businesses fail not as a result of lack of profitability but more so due to cash flow problems.
Cash flow issues arise due to outflows of funds being greater than inflows of funds. Yes, part of that would be due to lack of profitability. However, a profitable business can also run into cash flow issues for a variety of reasons, resulting in a lack of funds to cover rent, wages and overheads, amongst other important expenses.
In order to avoid this situation, you must have a strategy or plan in place for managing a cash flow crisis. Without this strategy, it would be difficult to save your business from going belly up.
Step 1: Accelerate Collection of Receivables
You may already have made the sale but have not received the funds. That being the case, it would prudent to accelerate the collection of receivables.
Some ways which you can achieve this include:
- Taking a deposit or upfront payment prior to delivering goods or services.
- Send your invoices as soon as you can, preferably immediately upon delivery of goods or services.
- Send invoices more frequently if you perform regular work for a client. Instead of an invoice every quarter, consider fixed monthly fee contracts where your accounting software sends out a regular invoice every month without you lifting a finger. Not only does this cut down on administrative costs, it also breaks down the bill into smaller, manageable chunks for your client.
- Monitor your Accounts Receivable listing regularly and chase up overdue accounts.
- Make it convenient for your clients to pay, including online payment options that accept credit cards.
- Consider engaging a debt collector if client fails to pay up after 3 months.
- Where possible and in line with practices in your industry, consider reducing credit terms.
Step 2: Negotiate Payment Terms
If you can delay or reduce the amount of cash payments from your company, it can help to alleviate the strain on your working capital.
It would be unwise to ignore attempts by your suppliers to contact you. It always pays to be honest and upfront with your suppliers who may be willing to negotiate payment terms.
Step 3: Slash Expenses
It should be a regular and ongoing process in your business to scrutinise your business expenses. At times, payments for ongoing contracts may be forgotten due to direct debits being set up.
A common occurrence is the payment of mobile phone bills after the phone contract has ended and the phone has since been misplaced or no longer in use. It is also worthwhile regularly reviewing the fees/prices of various regular service providers (eg. gas, electricity, internet, etc.) as they may have special deals to retain existing customers.
Some expenses may also be eliminated if you determine that they are not necessary for keeping the business operational and ultimately, do not help to generate revenue.
Disclaimer: This blog post has been simplified to cover some suggestions for averting a cash flow crisis. This should not be construed as advice from Glint Accountants. There are many other factors to be considered and each situation is unique. Therefore, we encourage readers of this blog post to contact Glint Accountants for assistance with their specific circumstances.
Geraldine Lee is Fellow of CPA Australia and virtual CFO at Glint Accountants. Contact us for assistance if your business is facing a cashflow crisis. We walk alongside you to get you and your business through the crisis.