Cash Flow Drying Up? Has Your Business Seen Debtor Days?

INTRODUCTION:

Cash flow! This is the biggest area of concern we see with small business owners and one as small business accountants stress to our clients the need to constantly monitor. Without cash flow, opportunities are missed such as supplier discounts, new technology or plant & equipment that improves efficiencies, necessary supplies, much needed advertising and of course a stress free environment that will encourage strong and well thought out business strategy. To make matters worse, business valuers will discount a small business valuation where it is shown to be chewing up cash even if the business is quite profitable. Smaller business valuations means less opportunities for effective succession planning.

For any business that sells on credit, debtor days is the first port of call to see just exactly what is going on with its affect on cash.

What then are the steps to get this analysis going?

Figure 1: Having cash in the bank will allow you to spend more time reading and doing the things you like! Photo courtesy Balmain Baz & Lara Scolari Gallery Balmain

1. Analyse Your Financial Statements

The first thing you need to do is look at your past three years' worth of financial statements and perform a debtors days calculation. If you are not sure how to do this speak to your small business accountant and/or small business advisor. Is the trend going up or down? Is it too high compared to bench marking or is it higher than your trading terms? If you have performed cash flow forecasts and/or three way budgets, how does the actual debtor days compare to these forecasts?

2. Review Your Trading Terms

Many business owners will set their trading terms based on trying to win business or the standard. They are frightened they will lose customers if they set them too low or lower than their competition. Whilst it is a great idea for cash flow as a purchaser to get as long as trading terms as possible, buying from someone who has longer trading terms might not be as good a business as those that don't which could mean that if your business has lower trading terms chances are your:

• service is better;
• product is better;
• delivery times are lower;
• returns/credits are less frequent;
• point of difference is stronger than your competition.

When dealing with customers to explain your trading terms and have your response to these objections ready!

3. Make It Easy To Get Paid

What payment methods do you offer and do you offer a settlement discount? Most people want to pay by EFT, EFTPOS, credit card and sometimes even cash. Do you make it easy for them to pay and do you thank them for paying on time? Depending on your size, I find it incredible that some won't offer EFTPOS or credit card due to bank charges. This is just another barrier to stop people dealing with you or worse still causing them to go elswhere to somebody who does make it easier to pay and spend money.

Figure 2: Fix your debtors and turn the tap on!

4. Review Software & Accounting Systems

Of course to improve debtors you need to have solid accounting systems that give you timely and accurate information so you can keep track. These days with cloud accounting on the rise and various apps are available to manage invoicing and automatic debtor follow up (e.g. Xero). Most small business accountants Sydney and Dubbo can assist with these systems, explain the benefits and even help set them up.

5. Invoice promptly!

How often do you invoice and when is the invoice actually raised? I shudder at businesses that invoice only once a month (usually at the end of the month) so this is a sure fire way to increase the debtor days unnecessarily. 

6. REview Systems & Follow Up procedures

Do you:

• check a customer's credit before taking them on?;
• cease supply if customers are outside terms?;
• have an automatic statement reminder system in place?; and/or
• have a debtors clerk?

How is money owing to you followed up?

Figure 3: To get money in it might be time to unleash the dogs! Photo courtesy Balmain Baz and Lara Scolari Gallery Balmain

CONCLUSION:

Some of these tips are fairly basic but sometimes people are too busy to implement them or feel guilty to act. Be sure to get help if required as once you take these steps you will feel a burden lift off your shoulders and your bank account.

Do you want more cash in your bank account?

The time to act is now!