Cash Flow Bucket List - 5 Things You Must Do Before Your Business Dies

INTRODUCTION:

I often get asked to analyse a business owner's balance sheet and profit and loss statement. One of the first things to do is to look at the cash flow of the business which is invariably its life blood. Any business that has problems converting its profits into cash will definitely be held back. It also can hinder those things that need to be done when a business plan has been updated. In order to get a business to its optimum level, it's very common that during the business planning process a number of items that need to be fixed will require extra cash. So today let's look at a quick checklist on the debtors side that you need to make sure you are on top of.

Figure 1: Letting debtors extend their payment terms is equivalent to sleeping on the job.

1. check invoice timing 

Review how long it is taking for you to get your invoices dispatched from the moment the sale has been made and completed.

Generally businesses will invoice:

• Immediately;
• Start of the month;
• Middle of the month; or 
• End of the month.

It is amazing the number of times I see invoices issued at the end of the month and then the trading terms are 30 days from the date of invoice!

Particularly with the advent of cloud accounting these days, invoices can virtually be created and emailed on the spot with a smartphone or tablet. If your accountant hasn't explained what accounting software that is best for your business and how you can increase you cash flow by using its features, ask them immediately for their thoughts.

2. change your trading terms

What trading terms do you currently use? Are they consistent across the board or are they sporadic for different customers?

Ask yourself why you offer what you do. You need to have the courage to talk to your customers and if you feel that you need to bring the terms in, ring them and explain followed by a letter and where approriate give them a month or so notice. If you do some what-if scenarios with your cash flow forecasts, you'll soon be able to work out how much extra cash you will have in your bank at any point in time.

If they really value your product or service, they will stick with you.

3. quote upfront

This might seem as though it's an obvious one but if you're in a business that gives estimates but then charges more once the final job is completed, be aware that these will often be queried and then particularly if they are not required to pay immediately they will often drag payment out either because they can't afford it or they are cranky that the amount was much more than they expected.

People do not like surprises!

The other advantage of quoting upfront is then creating an ability to offer a settlement discount if the amount is paid on order (rather than on completion). You need to be careful when discounting but this can be an extremely powerful way to not only entice payment before the work is done but you are also able to offer options and upsell with a technique called value pricing.

Figure 2: Lack of cash flow will drive you to drink!

4. send reminders or hire a debtors clerk

Waiting until payment terms are overdue and then chasing will only be partly effective. Using SMS to text customers that their payment will be due shortly can be a great way to collect your money sooner. Most software these days has this ability and invoice payment reminders can be set up so they go out automatically for those that haven't paid. Cloud packages like Xero are brilliant at this.

Do you have a person who chases money for you? What do they do? Are they only sending out statements or are they getting on the phone and asking the customer to commit to definite time of when the debt will be settled?

Figure 3: Don't get burnt by customers that refuse to pay on time. Photo courtesy of the author.

5. Do credit checks and cease supply where warranted

Never accept customers without performing credit and reference checks. For those customers that are continually late withhold supply or sack them. Your business cannot afford to be a bank for these.

What is your system to check that customers are more than likely to pay on time?

CONCLUSION:

Check the above 5 things in your business and determine whether you can implement some change to create better cash flow. Accountants and business advisors will be able to perform an analysis on your business and fine tune its cash by considering these simple tips.

Failure to jump on these areas could see the death of your business so create your business bucket list and let your enterprise do the things it wants to do before it's too late!