Less Cash Flow = Lower Business Valuation = More Stress!

INTRODUCTION:

As small business accountants we often query our clients as to why their debtor days are so high which is affecting their cash flow. We usually get all sorts of reasons but very rarely are they ones that cannot be addressed. Yes it is true that those who are selling to big companies are often asked to extend their terms by as much as 90 days. This makes the client think they cannot afford to demand lower terms or they could lose the customer which may or may not be true but many don't realise they run the risk without further analysis of sending themselves broke in the process!

Damian Arena, Managing Director of automated debtor management software IODM says that research shows 72.5% of all business invoices are paid late. The ACCC research also shows that payment terms over the past year extending to 61-90 days has increased by a massive 22%!

Business valuers seeking a higher business valuation and banks assessing business valuations of their clients will always look at cash flow forecasts and indicators when deciding whether to inject more capital into or invest further.

Here are some things that need to be checked in order to get more cash into the business.

Figure 1: Time to bring in the dogs to get paid?  Photo courtesy Lara Scolari Balmain and Balmain Baz.

1. Be Very Clear Upfront

If somebody wants to deal with your product or service, you should be very clear about your payment terms upfront. Too often in the excitement of winning a new customer, this can be seen as low priority by owners or salespeople as they assume they will lose the business to a competitor.

Making sure payment terms are very clear initially will give you a much better chance of getting paid earlier and you will not feel guilty about chasing the amounts that are overdue.

Never ever accept long payment terms (particularly with big companies) until you have sat down with your small business accountant or small business advisor who can then run some scenarios through their three way budgets to make sure that you are not going to run out of money extending these terms or have alternative ways to plug the gaps in the meantime (loans etc). 

2. Perform Credit Checks

Again in the excitement of getting more business particularly if it's a large account, credit checks aren't always performed as it is assumed that the company is big and therefore will never go broke. Any decent size customer should always be checked out or in the event of any bad debts, any profits you may have made might be wiped out completely not to mention the strain they put on the business whilst you had them before they went under!

Figure 2: Never assume that someone looks like they are good for the money! Credit checks are a must.

3. Have Automated Reminder Systems & Manual Ones

Having a debtors clerk and/or an automated reminder system through cloud based applications such as Xero and add-ins like IODM will certainly help and at minimal cost.

If you let customers continually be late one month for example, they will wait until you call them again when they are late one month again into the future.

Where necessary take action and cut off supply until all outstanding invoices have been paid for and they will soon get the message.

4. Offer More Payment Options

Offering more payment terms often with incentives such as payment discounts will usually work rather than just the one amount being the invoice with standard payment terms.

Consider being paid by credit and debit cards (EFTPOS terminals) and BPay where necessary and even offer a direct debit payment plan. EFT should be the main way you get paid these days.

CONCLUSION:

How do you manage your cash flow? Have you considered any of the above or are you just hoping that customers will pay you more quickly into the future?

Hoping to get paid on time will never happen unless you act NOW!