Cash is Queen
“Revenue is vanity, profit is sanity, but cash is king” – or in our case; Queen!
Let’s be honest, having solid cashflow is essential for any sustainable and thriving business. It’s going to keep the doors open and allow for investment and long-term growth. Profit and Cashflow however, are two very different things and should not be confused. Many business owners wonder why they are making a solid profit yet are struggling with their cashflow, so let’s break it down.
Profit is simply the total sales you have made, less the costs incurred to make them. Your total revenue, less your total expenses, is your profit for that period.
With cashflow however, you need to factor in - the timing of receiving cash inflow from sales, the timing of paying for your expenses, various taxes you will need to pay including GST and income tax, the timing of purchasing capital equipment or stock, payments toward reducing your business debt, and of course, paying the business owners for no doubt the countless hours they put in. Phew! There is quite a bit to factor in isn’t there?
We understand it isn’t always easy, so here are some of our key tips on creating better cashflow in your business -
Have clear payment terms. Clear payment terms set up the payment expectations between you and your customers/clients. For Business to Customer (B2C) organisations, payment is generally expected at the time of the product purchase/service provided, however this still needs to be clear to customers. If you are a service organisation, you might want to consider having a sign at reception, or having your receptionist mention the payment terms at the time of booking. For Business to Business (B2B) organisations, there is often a lag in timing of payment, and we would recommend your explicitly state your terms of payment at the beginning of any engagement, as well as include these in your business proposal(s). Consider what payment terms are normal in your industry, but the sooner you can get paid (i.e. within 7 days instead of 20 days), the better it will be for your business.
Also make sure your invoice template clearly outlines when you expect to receive payment by, and note any interest or debt collection costs that might be applied on account of late payment.
Complete your invoicing, including interim billing, as regularly and consistently as possible. Have a system in place whereby you review your workflow and any invoices that need to be raised, regularly, such as a monthly calendar reminder. Working on a big project? No worries. Make sure it is clear to your client that you will be sending interim bills for work completed, monthly. Again, the sooner your can receive payment for the work you have completed, the better.
Consider employing someone, or outsourcing, a debt collection team. As busy business owners it can be hard to do everything. Having an employee onboard to consistently review and manage your debtors, and/or an outsourcing function to help collect your old debt, can be of huge benefit.
Recurring revenue. The more recurring revenue you can generate for your business (i.e. repeat and regular customers) the better. Recurring revenue gives your business consistency in cash inflow, and there will be additional cash savings made from having a repeat customer come back for your product or service. Recurring revenue also allows for steady growth, planning and forethought.
Delay/plan your payment to creditors. Although we would never recommend paying your creditors late, there is benefit to your business, if you pay them on, or close too, the expected payment date. What payment terms can you negotiate with them when you are struggling? Will they allow you to sell their products on consignment?
Stock purchases. Purchasing the right amount of stock and at the right time, can have a bit impact on your cashflow. If you purchase too much stock, that is slow to sell, it takes longer for the business to convert it to cash. It may even become obsolete! Smaller more frequent purchases would be a safer option when available. If something sell’s well, it is likely you will be able to order more.
Consider and plan for capital expenditure well ahead of time. Capital expenditure spend needs to be consider in your overall operating budget. What will your ROI be on this purchase, and more crucially, how will this be funded?
Consider your debt/capital structure. The repayment terms of your financing can heavily impact your business. Although you may be keen to pay down your external debt quickly, it may mean you don’t have enough left over to pay for your tax, or even the business owners for that matter.
Get help and regular advice on how much money you should be saving and paying to the IRD, to meet your income tax obligations. Not paying enough income tax as your profit increases might make your business prone to late payment and interest charges from the IRD. Paying too much, might mean you are losing out on much needed cash reserves required to grow your business.
Consider having the shareholder-employees on payroll. In my experience, and when earnings have become consistent enough, there is a lot of benefit of having the shareholders on an annual salary, with PAYE and Student Loan repayments made regularly. Although there are a few downsides to this, there are a lot of benefits to help the business owners manage their own taxes, and also ensure they get paid.
Have a well thought out budget and cashflow forecast in place and get expert help!
Having a budget in place gives you clear definable targets. It gives you a goal in terms of sales you want to achieve for the month, and will keep you on track to ensure you don’t overspend. A good budget however will extend into a cashflow forecast – because as we now know, the net profit you make is very different to your actual cashflow movements.
When your business reaches a certain size, it’s most likely that it could benefit from having a part-time (or even full-time) CFO or Finance Manager in place to help you keep on track of budgeting and cashflow management. Having an efficient capable finance expert should be seen as an investment rather than a cost – and will likely save you stress, time and money in the long-term.
If cashflow is something you are struggling with, please reach out to me for a confidential chat to see how I might be able to help.