Why do so many businesses fail in the early years? You might be surprised to learn that it’s cashflowproblems, rather than profit, that lead to the downfall of start-up businesses.
According to the Australian Bureau of Statistics, more than 60 percent of small businesses cease operating within the first three years of starting. The Australian Securities and Investments Commission released a report into corporate insolvencies for 2011-2012 that found 40 percent had inadequate cash flow or high cash use which led to their failure.
By generating enough cash, a business can meet its everyday business needs and avoid taking on debt. Without generating adequate cash to meet its needs, a business will find it difficult to conduct routine activities such as paying suppliers, buying raw materials, and paying its employees, let alone making investments.
A well-managed cash flow is the key to your business success. But how do you know if your cash flow is well managed?
Key Questions to Ask About Your Cashflow
Can you access daily receipts and payments across all your accounts?
Visibility is critical to better cash management. Do you have access to an online dashboard or report that shows your accounts receivables, how much is outstanding and whether you have any potential bad debts? Better cash flow data will give you better visibility into your entire operation.
Do you tap into your working capital to pay business expenses?
Are you having trouble maintaining your working capital? Working capital should be reserved for unplanned expenses or growth opportunities. You shouldn’t find yourself routinely draining working capital for planned expenses – like meeting payroll or paying utilities. That’s a sure sign you need a system for better matching your cash inflows and outflows.
Do you have the data you need to negotiate with key vendors?
If your cashflow is chaotic, you may not be able to negotiate with key suppliers. When you have a stable cashflow, you can negotiate the best rates and terms with key vendors.
Are bad debts beating you?
Make sure you agree payment terms with customers in advance of any deal, and be sure to vet who you are trading with, particularly for new customers. Be clear about your payment terms, set credit limits and stick to them.
Plus, the quicker you invoice customers, the more likely you are to be paid on time.
Do you have an escalation process?
Ensure you also have a process to follow up on any late payment. This should include letters, email, and telephone, with the need to stay flexible if the amount outstanding is large, or if you have concerns over the customer’s financial viability.
If you don’t have the time or expertise to do this, an option is to outsource your accounts receivable to a specialist. Outsourcing may be cheaper, more flexible and kinder to your cashflow than you might think.
Letting someone else take over your accounts receivable allows your company to focus on what really matters for your business success. Outsourcing companies will chase down delinquent payers for you, so you can have more time on building and growing your company to its full potential.
Are you forecasting your future income?
Working out what’s likely to be coming in, and when, can help you plan for any potential difficulties. Building a cashflow forecast model will generally give you a good idea of where your cash position will be.
It’s also a good idea to track your outgoings. This may include suppliers, utilities, wages and taxes. If you can see cash flow problems coming up in the future due to a large tax bill, you can take steps now to prepare.
Are you using finance solutions to your advantage?
Finance solutions like invoice finance now make it possible to receive payments with 24 hours of issuing an invoice. You no longer have to wait 30 days or more to receive payment. Finance providers will give you 80% of the value of an invoice within 24 hours, with the remainder paid once your client pays.
Is your cash management solution tailored for your industry?
Every industry and every business have unique cash flow needs.
Whatever type of business you have, it’s important to work with a cash management specialist who understands the cycles and challenges that affect your business’ receivables and payables.
Contact us today to find out more about how our tailored finance solutions can solve your cash flow problems and help your business to grow.