Whilst the end of the year can be one of the busiest times of the year for small business owners, many find that January is one of the quietest. And whilst that can mean you (finally) get a chance to get your new years ducks in a row with setting or reviewing your goals and a bit of a general tidy up, it can also mean a dip in cash flow.

That often can prove to be quite troublesome for sustaining the business – especially if you’ve got staff, but also for your growth plans (not to mention your profitability).

Cash flow issues might mean you can’t;

  • pay your creditors in your usually timely fashion.
  • purchase inventory to cater to increased demand.
  • invest in growth oriented strategies.

However with a little bit of strategy and planning, you’ll better meet your financial commitments and keep your business operational until cash flow returns to normal. 

Causes of cash flow issues

First though, it might help to look at what the root causes of cash flow issues are and how it’s possible to solve them. 

Bad debts

The most obvious cause of cash flow issues are the customers that don’t, won’t or can’t pay.  Maybe they’ve gone into receivership, they’re arguing over something or they’re just not responding to reminders.

Delayed payment

Quite possibly, some of your customers’ businesses shut down completely for weeks or run skeleton staff on their operations such as accounts payable departments during the holiday season. And that can lead to delay in processing your payment. Other clients might not receive money from their customers and this leads to a knock on effect of them not being able to pay  you in as timely a manner as they would normally. And some customers face such a significant cash crunch they may not have money to pay you for more than 2-3 months.

Or maybe you extend credit up to 60 days to some better or bigger clients which, especially when combined with other customers suffering cash flow issues of their own, might cause an even harsher cash crunch for you.

Spending dips

Maybe this is the time of year your retail/etail customers go on holidays  (ie: they physically can’t make it into your store) and/or they stop buying what you’re selling for a longer period of time because their needs are saturated or there’s a change in conditions (it’s unseasonably cold/rainy and you sell icecream, swimwear or day-tours).

Not being properly across your numbers

For many small business owners, the cash in the bank equates to how well the business is doing. However that can be misleading and leave businesses in a cash flow hole when GST, PAYG and super are due for payment. And the ATO are increasingly cracking down on small businesses that allow themselves to get into arrears in their tax affairs.

The cumulative effects of some/all of these can lead to a not just tight cash flow, but a negative cash flow. 

10 possible cash flow solutions

  1. Invoice asap. As soon as a job is done or goods are supplied, send the invoice – don’t wait for the end of the month. Better still, if you’re supplying a job over a period of time, invoice on milestones. Say 50% up front, 25% for first milestone and final 25% on completion (or whatever works for you). Or maybe it’s a yearly fee – but billed monthly on the 1st or last of the month.
  2. Use a bookkeeping program like Xero to keep track of who’s paid and who hasn’t. It tracks invoices out against money into your bank account. It means you’re not holding everything in your head – a sure fire way of losing track of stuff.
  3. If you run a business where this is the time of the year where clients are cash strapped or slow in paying why not offer an incentive to pay before the due date. It might be 3, 5 or 8%. You’d be surprised at the difference this can make to payment times.
  4. Offer a freebie or credit back for the next purchase with timely payment. Not only does this get you paid, it might also stimulate the customer’s next purchase.
  5. Offer payments by credit card. Again, it might cost you merchant transaction fees of 2-3%, but if someone’s having issues paying a bill, being able to put it onto a credit card and think about it later can be a winning payment strategy for you.
  6. Think about using invoice factoring, i.e. get short-term cash from financial institutions on the basis of invoices raised and pay back when your invoice is paid for. You will incur some cost here, but it might be better than slipping up on payments to creditors or dealing with increased stress.
  7. Tighten up your terms of trade. If customers are routinely paying 60-90 days on 30 day invoices, change your terms to COD, or 7 days. And reserve the right to add a daily interest charge for delinquent customers.
  8. Do a credit check on customers you allow to pay on terms. It sounds boring and adds another thing to your growing to-do list, however, it will also prevent you being caught out by serial non-payment offenders.
  9. Send payment reminders – early and often. And keep sending them until payment is received. Sometimes it’s just a case of a customer forgetting. But if it’s not, and you want to be able to go to small claims court (for amounts under $10,000) you’ll want to be able to show you’ve put significant effort into chasing the debt. Xero has this as a standard option as part of its packages and it can be easily automated.
  10. Ensure you’re across your tax and employee obligations (super, leave loading, etc) and you’ve got those payments covered. If necessary, squirrel your anticipated payments into a separate bank account on a monthly basis.

And an added extra one just for good measure – do a cash flow forecast:

If you prepare a cash flow forecast, it will also help prevent future issues for your business. It will help you answer questions such as;

  • How much cash will the business need in the year?
  • Which months will you see a surplus and in which months a deficit?

And a comparison of the actual cash flow against your forecast will give you great insight into your business.

So there you have it. With some planning and strategic thinking, you can win the battle of the cash flow and continue to steer your business on its path to success. 

And we can help with that too. If you’re looking to implement moving to Xero or you’d like help with factoring or cash flow forecasting, we’d love to talk to you. You can call us on 02 6023 1700 or drop us a note via the form below.

Got a question? Get in touch

If you've got financial or business questions, or you just want to run something by us, we'd be delighted to really talk to you – in person, over the phone - call us on 02 6023 1700 - or you can use the form below and we'll get back to you.

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Kerry Lloyd

Tanya Joss