Revenue is coming in the door…you seem to be meeting all your income targets and you’ve been keeping a close eye on expenses. Why then is that hard earned profit not showing in your bank account?
Quite simply.. Net profit does not equal cash in the bank!
The main culprit is timing. For many businesses the timing of income received is a big deal! It’s what keeps you in business.
So what can you do to improve cash flow?...
What are your invoice terms?
The time it takes to receive funds from customers can often be too long. In this current digital world where electronic invoices can be sent, received and paid for within minutes, consider aiding the flow of cash by gradually reducing your billing terms a few days earlier each month over a period of 6 months. Your invoice terms should ideally be no later than 7 or 14 days.
Are progress payments an option?
Consider sending customers progress invoices. This is essential for projects or jobs worked on over several weeks. Set clear terms in your customers contract so they are aware when progress payments are due. Leave only 10-15% balance to be paid on completion.
Follow up on overdue invoices?
Always follow up on overdue invoices. Utilise your Accounting software to send out automatic reminders to late paying customers. Setting up automated reminders can improve cash flow without the cost of a debt collector.
Do your invoices have clear payment details?
Ensure your bank details are clearly shown on your invoice. Nothing delays payment more than bank details the customer has to chase up. Consider using PayPal details on your invoice to make paying you an easier and faster option.
Are you paying creditors too soon?
Ensure you are paying your creditors on time but not too early. Do your suppliers offer 30 day trade terms? These are worth taking up if there is a delay in your income stream.
Do you have regular business loans or tax debts to pay?
Only the interest portion of these loans will be deducted from your net profit; however your back pocket will be affected by the total amount of the loan repayment. Ensure you budget for these loan amounts. To avoid large cash flow surprises such as your quarterly BAS or tax debts transfer a set amount into a business savings account each week.
Is now the right time to make a large capital purchase?
A large purchase of equipment won’t entirely reduce your profit. Only the deprecation portion will, however the total outlay will certainly affect your bank account. It is the same for stock until it is sold. Consider the timing of the purchase of your asset or product? Is this the right time to use cash to invest in these assets or do I need to take out a business loan to assist my cash flow?
Managing cash flow with a quarterly statement of cash flows
Consider mapping out a quarterly statement of cash flows to assist you further with managing your precious $$$. Remember even profitable businesses can run into cash flow crisis and it is therefore essential to business owners to not just monitor their businesses health purely on Net Profit but also have a strong understanding of its inflows and outflows of cash.
For assistance in managing your businesses cash flow please contact Transcend Accounting via email or Ph. 0404 033 464.