Why do businesses fail? If you look at one study from Wolters Kluwer CCH, there is a multitude of reasons given, but one stands head and shoulders above the rest. While 'inexperienced management', 'poor marketing' and 'too much expansion too quickly' all feature highly, it was 'failure to manage costs / anticipate rising costs' that was the most-cited reason for company failure.
A total of 61 per cent of respondents to that survey thought this was the biggest issue for faltering companies. To avoid the full drop into business bankruptcy, taking proactive steps to ensure you can meet your cash requirements is a necessary part of managing your business. Costs can become a cashflow problem if revenue drops, expenses increase or your business is growing quickly. Budgeting for your cashflow needs before payments fall due is key to saving your company. But how do you boost cashflow, exactly?
Speed up the inflows
Are you having trouble following up invoices? Being a little more active in collecting your debts might help – invoicing in line with your cash cycle can help too. For example, if your costs are paid fortnightly, make sure your invoices are too.
Follow-up calls or in-person meetings can also be more effective than sending emails.
Follow-up calls or in-person meetings can also be more effective than sending emails to clients that owe you money. You may even want to incentivise early payment to ensure the bulk of your funds come through on time. Make your incoming cashflow a well-oiled machine before there is even the slightest hint of a breakdown or you need turnaround and restructuring.
If you don't feel comfortable approaching your clients for payment or you're in a slow-paying industry, consider engaging a debt collector or debtor financing to give you access to your cash sooner.
Check credit histories
Too often, businesses will offer credit terms to clients that might not actually be able to pay what they owe on time – or at all. Performing the right checks and balances before giving credit to a customer is going to be essential. Check with a credit reporting service or ask the company to provide you with current financial statements or an aged payables ledger to back up their ability to pay invoices.
Additional measures to ensure you receive payment include requiring personal guarantees or supplying goods on retention of title terms registered on the PPSR.
This sets up stable relationships with customers – it's better to be safe than sorry.
Slow down the outflows
Only purchase the stock you need to reduce your working capital requirements and if your suppliers invoice you on a monthly basis, pay on or just before the due dates and consider purchasing early in the month to maximise the period of credit.
If you know you have a large payment coming up, perhaps for a quarterly BAS or rent, ask your suppliers for an extension of their payment terms or agree an instalment plan to keep them happy.
Predict the future
One of the most crucial documents for your business is a cash flow forecast, for at least the next three months. In fact, Business Victoria calls it "the most important business tool for every business". You need to take stock of a wide range of inflows and outflows, such as the following:
- Revenue, rebates and government funding,
- Rent, wages, superannuation, insurance and other trading costs,
- GST and PAYG tax payable on your ATO activity statements,
- Finance and loan payments, and
- Further investment planned for the business.
Make sure you understand every potential piece of your overall cashflow so you have a clear picture of your business' cash needs for the near and more distant future. This helps you avoid situations that lead to requiring pre-insolvency advice, but they aren't total fix for large scale issues. For more information, make sure to speak to the business and pre-insolvency experts at Cactus