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The effects of cash flow
"Cash is king" is the age-old proverb that explains the need to keep your cash flow healthy when your customers are paying little by little slowly. Unfortunately, this is an issue for small businesses now more than ever due to the worldwide COVID-19 pandemic.
A business's cash flow is frequently mentioned as a critical factor in the likely hood of longstanding success. A business could have extraordinary revenue, moderate expenses, and substantial income, but if its financial procedures are not planned efficiently, it could however have a negative cash flow. however
An essential factor to operating a positive cash flow is vital in manage your business.
In the course of the nationwide lockdown in New Zealand from 25 March to 29 April 2020, the effect on small to medium businesses was experienced hard instantly. Business owners were left struggling, with many not able to close their doors and managing an online selling platform at a sudden notice. Though the Government distributed subsidies to keep the economy steady, the outcome has been intense.
A number of successful businesses went from good profit margins to zero income in just a matter of days. But, although we can now say the stress of that time is behind us, we find business owners are now focusing on strengthening their business continuity planning for the future, which includes improving their cash flow cycle.
Awareness of working capital and its influence on cash flow
Working capital cycle: How long will it takes from start to finish in a business process and receiving the realized cash in your hand.
To accurately understand cash flow effects on a business, you need to recognize how the working capital cycle works.
Making use of the basic diagram, as shown above, is an illustration of a business that manufactures its product - if each period in this cycle takes approximately thirty days, this business will fund its sales through cash or finance for a hundred and eighty days. This is just under six months which is a long time for any business to survive, especially in the current situation.
If you then take those hundred and eighty days and add in variables such as debtors who take longer than thirty days to pay, the amount of stock you are keeping, with production delays, you can see how your working capital would drastically affect your business's cash flow.
Planning an efficient financial operation to get positive cash flow
As a business owner, can you aim to decrease the timeframes in the cycle and make sure that your business remains highly profitable and cash-ready?
Here are some suggestions:
- Be honest with customers about your due dates, terms, and penalties. Display due dates boldly on your invoices and ensure your late payment penalties are also shown.
- Have you reviewed your payment terms recently? Are you operating on a thirty days payment system? Why not consider reducing this to seven days payment terms as it is becoming a more popular trend.
- Offer your customers choices to pay, as no one payment system suits all. For example, provide opportunities for online banking, credit card, funded payments, etc.
- Suppose you are in a service business that works on a time arrangement basis, keeps detailed records, uses software to your benefit, and creates detailed timesheets of the work done. This offers your customer clarity and builds trust.
- Think through the frequency of your billing? For example, do you wait for the 20-day of each month to invoice all your customers? This could be seen as a wait of up to four weeks between the work being completed and the invoice being received by the customer, and in addition to that, a thirty days payment term could mean it is two months before you see payment for your services. Think through changing your billing practices upon completion of the job.
- Do you take deposits? If you must purchase high-value, non-refundable items to finish a job, consider seeking a non-refundable deposit from your customer. Make sure that your terms and conditions efficiently cover the deposit paid if the customer may cancel. This decreases the risk of being out of pocket for items that could take a while to move on.
Though these items are of little importance, they can have a significant and immediate impact on your cash on hand. By efficiently decreasing your debtor days, you could quite earlier and see more cash in the bank faster.
It does not discontinue there, though!
Putting an effective billing operation in place is one part of managing. What if your customer does not make payment?
This can sometimes be embarrassing when getting paid, so you should not be afraid to ask for money owed, repeatedly if necessary. However, by placing an accepted collections procedure in place and then adhering to it, you will discover that not only do customers like this regularly, but it will make sure that your invoices are paid on time more regularly.
More and more businesses use cloud-based accounting software programs. Setting up automated follow-up emails in place is simple. But do not depend on automation alone; personal interaction is vital in developing long-lasting relationships with your customers.
Having a collections process could look like a mix of both forms of contact, with an example below for a 7-day payment term:
• One day before the due date – a reminder email there is an invoice due the next day
• Three days after due date – an email advising an invoice is overdue
• Seven days after the due date – a personalized phone call or email inquiring about non-payment
• 14 days after due date – communication sent notifying penalty interest will be charged
• 30 days after due date – stop any further services unless payment arrangements are made
Stay ahead of the game
Not having a positive cash flow cycle, any business will go bankrupt no matter how promising the model, financial operations, or collection process.
Certainly, if a business has just been opened, it may be able to experience negative cash flow in the short term in anticipation of achieving long-term success. But ultimately, every business must focus on generating positive cash flow. Without this, a business will not even accomplish the minimal responsibilities of paying the monthly expenses.
Appointing a bookkeeper in helping and managing your cash flow
Having read this blog, you now have sufficient reason to justify engaging a bookkeeper for your business; search the directory for a Certified Bookkeeper near you.
Contact an ICNZB Certified Bookkeeper® who can assist you in managing all aspects of your invoicing, debt management, collection process.
A bookkeeper will be an essential member of your team, so collective trust and respect are crucial. We suggest interviewing potential candidates to determine if you feel they will be a good fit for you and your business. Read our tips on finding the appropriate bookkeeper for you here https://www.icbnzbai.org.nz/Find-a-bookkeeper
While working with us, you are guaranteed the day-to-day upkeep of all your cash flow transactions. Timely managed reporting. Our main objective at Business Pillars Limited is that customers receive satisfaction. Therefore, we provide outstanding customers the services; please feel free to contact us https://www.businesspillars.co.nz
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