Has your business been focussing on sales and profitability at the expense of cashflow?
It is something we’ve seen businesses doing over the past couple of years.
Without positive cashflow your business can go broke.
In a previous Pitcher Partner’s Newcastle insight article, Sam Bacigalupo provided tips on preparing a cash flow budget as part of good cashflow management. In this article, we focus on getting on top of debtor management – making sure you are getting paid as quickly as possible for the work you do.
Why is cashflow important for businesses?
Revenue is vanity. Profit is sanity. Cashflow is reality.
Business owners must focus on sales, profitability AND cashflow. Without cashflow, businesses can’t pay immediate expenses such as rent, wages, superannuation, tax liabilities, loans and other overheads.
Tips for improving cashflow – debtor management
One of the common reasons for poor cashflow is poor debtor management. Here are our top tips for getting your accounts receivables processes working as hard as possible to boost business cashflow.
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Focus on closing out projects
Let’s say your business has three projects on the go for clients. Two are more interesting and demanding of attention. The other project is 95% complete and needs a little push to finish. Ensure the team closes that project out and invoices.
Make sure over-servicing of clients is not the reason for delays too.
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Adjust your invoice timing
If you have clients on retainer or a do and charge basis for ongoing work, you probably invoice monthly. Consider moving to a mid month invoice or fortnightly or weekly invoicing.
If you have 30 day end of month terms, get your invoice timing right so you don’t delay a payment a further 30 days.
If you are delivering a longer-term project for a client, determine progress payment terms up front. You may ask for a payment fee at the start of the project and then at regular intervals or delivery of key project milestones.
Put these invoicing arrangements in proposals and service agreements.
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Shorter payment terms
Do you know what terms you have on invoices? If it is 30 days, could it be 14 days or 7 days? Some customers or clients will have set terms for paying your invoices, but you may be able to negotiate. If you don’t ask, you don’t get.
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Make sure your invoices are compliant
A common reason for late invoice payments is because the invoice didn’t meet the customer’s requirements, or it wasn’t lodged in the correct way or to the correct people. Check if you need a purchase order number prior to invoicing and if that number must be put on your invoice.
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Use AI where possible to follow up
Systems such as Xero have automatic payment follow up functions you can activate. There are other apps you can use too.
As well as overdue payment reminders, consider a courtesy reminder of upcoming payments. Check you are happy with the system’s letter or text message that will go out.
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Have the right humans managing debtors too
AI can only do so much in chasing and managing debtors.
Everyone in the business needs to be educated and focussed on the importance of ensuring work is completed, properly invoiced, and paid quickly. Make sure the person in charge of issuing invoices and ensuring prompt payment loves their work. Sometimes this task is one of several for an administrative person and may not get proper attention. Consider contracting out the function to a trusted specialist.
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Make it easy for clients or customers to pay
Providing customers or clients with more ways to pay can improve cashflow. Immediate payment of invoices via credit card is one option. Having the money in your bank sooner may be worth additional banking fees.
Be careful of discounts – a 2% discount for 30 day earlier payment is the same as an annual interest rate of 24%!
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Consider invoice finance or debtor financing
Invoice financing or debtor financing can provide cash as soon as your invoice goes out. It may be a better alternative to a bank overdraft but requires careful consideration. Talk to your business banker and business advisor about to see if it the right option for your business.
Pitcher Partners helps make improving cashflow easier and more effective
The Private Business and Family Advisory team at Pitcher Partners Newcastle and Hunter are highly experienced in providing practical and effective systems and strategies, customised to improve and manage the performance of businesses across many industries.
Schedule a free consultation today.
Have a question about maximising cashflow/improving cashflow?
We love questions. If you want to know more about improving cashflow or need other help with Tax and Business Advisory or Business Strategy services please contact us.
Scott Edden is a Partner at Pitcher Partners Newcastle and Hunter. He is a trusted advisor to clients across many industries. His breadth of experience spans taxation advice and assistance, financial analysis, business valuation advice, management reporting, budgeting and cashflow management. His decades of experience means Scott understands how to mitigate business challenges and seize opportunities.
