Accounting Success - Plan Your Cash Flow
It is estimated half of business failures are due to a lack of cash. Many entrepreneurs start their business with inadequate cash reserves. Finance company’s and banks are not keen on lending too much money that is unsecured and often insist on taking security over personal assets. Which is fine if you have assets and are prepared to use them as security.
So, we take a risk and jump blindly into business.
Take control of the risk. Prepare a realistic budget of what your business expenses and revenue will be in cash terms on a weekly basis for the next three months. Identify any weeks that will see a cash deficit – plan how you will manage these. Is there enough cash for you to take some drawings to meet your living costs? Remember you will have tax and GST obligations; as a rule of thumb take 30% – 35% of your revenue and put it aside to meet your tax obligations. This isn’t perfect but it is much better than doing nothing!
It is not unusual for many small to have insufficient funds to meet the business owners living costs. What plans do you have in place to meet your living costs? Do you have savings you can use? Can you reduce your costs by moving somewhere cheaper? Do you have a partner who can cover your living costs while you get established?
If you are starting out in business sometimes you get caught out. Your suppliers won’t give you credit (because you are new in business) and you give your customers extended credit just to get the work. Just be aware of the implications of this and think about how you will manage it. Could you get a business credit card to purchase from your suppliers?
Review your Terms of Trade
Your terms of trade spell out to your customers when you expect payment. It is common to see a business terms of trade set as 20th of the month following invoice. But does this work for you?
If your business is labour intensive you are likely to be paying weekly or fortnightly to employees and/or contractors. So how do you get the cash from customers quicker to help meet the cash outflow?
What leverage do you have over a customer where you have completed a repair to an appliance or plumbing? Not a lot probably, compared to a regular customer who you undertake work for regularly. Should these customers have the same terms of trade?
- Payments expected on completion of the job
- Payments 7, 10, or 14 days after completion of the job
Your terms of trade set expectations for your customer and help you manage your cash flow.
Make them work for you!