Cash flow kills 90% of all small businesses
How poor business cash flow management kills 90% of all small businesses
In small business, cash is king. Cash flowing in and out of a business is the lifeblood of any business. The lack of cash to pay for expenses as they fall due is a cash flow gap. Cash flow gap arises when business owners do not know its business needs.
According to Accountants Daily, Cash flow plagues 92% of all businesses. In Australia, poor cash flow management kills 90% of all small businesses.
When invoices are not paid to suppliers, suppliers can disrupt the inputs necessary for the production of goods and services in the business, which in turn disrupts revenue (and often the reputation of the business). When the reputation of the business is affected, sales and revenue can diminish substantially, and then suddenly, things can go down hill very quickly.
When taxes are not paid, the tax office (ATO) can also take action and inadvertently disrupt your business trading.
Cash flow funding
Small business owners can access cash through a variety of lending products on the market, such as
- Short-term business loans
- Business term loan (typically larger sums over longer term)
- Business line of credit
- Asset financing
- Equity cash out (from residential or commercial real estate)
- Invoice financing
- Personal loans
- Vehicle Loans
Despite funding options on the market, many small business owners only seek help with business cash flow when pressure in the business is at breaking point. Funding options will dwindle if business owners seek help too late, and the cost of borrowing is also likely to be higher.
Although business loans and a line of credit can be available within hours, access to funding options should not replace proper cash flow management in the business. Below are a few good practices around cash flow management:
Better cash flow management
1. Send invoices immediately
Send invoices to your customers immediately to signal that your business is serious about keeping the cash flowing in your business. Your customer will come to respect that the way you conduct business is professional and enhances their opinion of your business.
Conversely, if a business does not practice good invoicing hygiene, customers will draw the wrong conclusions about the services and products you deliver (and oh yes, they take longer to pay too).
2. Build a month-by-month cash flow forecast
Build a month-by-month cash flow forecast for the next 12 to 24 months. By doing this, you will understand your future cash situation, and take early action to plug possible cash flow gaps. By taking early actions, you may also save money on borrowing costs, prevent disruptions to the business and preserve your business reputation.
3. Offer incentives for upfront payments
Offer small incentives, such as a discount to customers for upfront payment. Depending on the type of business you are in, you can be creative with this. For example, for customers who opt to pay upfront, you can reward them with special access to exclusive offers or products.
4. Conduct customer credit checks
Much of the work you do to chase up on unpaid debts comes only from a handful of customers. Hence, do your homework and run your normal credit checks on prospective customers. To further protect your business:
- Only offer credit terms after the customer has proven themselves from paying upfront over an agreed period
- Request that the customer signs a personal guarantee
- Ask the customer for a personal assets & liabilities statement as part of the credit application process
- State clearly in your terms & conditions the actions you are allowed to take if they do not meet the agreed payment terms
- Set credit limit at the lower end of the scale. You can always review the credit limit later on, or at the end-of-the-financial year.
You can also improve your cash flow by asking for extended terms from your suppliers and choosing suppliers that offer extended trading terms. Refrain from buying equipment and big ticket items from the business cash flow. Leased or hire purchased assets free up cash flow and are more tax effective.
The information on this website is provided for general information only and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from financial, legal and taxation advisers. Although every effort has been made to verify the accuracy of the information, we disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy, or omission from the information or any loss or damage suffered by any person directly or indirectly through relying on this information.