8 minute read
Top tips to keep on top of your cash flow
Do you understand your numbers?
It may be a cliché but it is indisputable - cash flow is the lifeblood of any business. Here are some top tips to keep on top of cash flow.
Cash inflows
Invoice promptly
Don’t wait until the end of the month to send out invoices, invoice throughout the month.
Communicate your credit terms
Clearly state the payment due date on your invoices and statements as well as your bank account to encourage customers to make electronic payments.
Review your credit policy
Often payment is required on the 20th of the month following invoice. However, if you invoice customers regularly throughout the month and issue one customer an invoice on the first of the month, you will wait around 50 days before getting paid. By comparison, an invoice issued on the last day of a month will be paid within 20 days. Consider adopting a payment policy of 30 days after the date of invoice.
Know your customer’s payment process
Many larger corporates have a streamlined month end financial reporting process which may mean they stop processing invoices for payment a day or two prior to month end and after that the invoices are processed the following month. It is worth knowing if this is the case for your major customers so you can ensure your invoices reach their accounts payable process in time for prompt payment.
Prompt payment discount
Offering discount for prompt payment may seem like a self-imposed reduction in revenue however consider the additional interest cost you are incurring to fund your customer’s late payment.
Accept payment by credit card
Encourage customers to pay immediately by credit card. The customer still gets some free credit from the credit card company and may also get other benefits such as air points by paying on their credit card. While you will incur credit card charges, these may be outweighed by saving in interest cost otherwise incurred, as well as the time spent following up on overdue amounts.
Review customer credit history
If a customer has a history of slow payment, consider changing the credit terms by introducing a late payment finance charge, shortening their credit term or even eliminating credit entirely. You don’t have to offer the same terms of credit to all of your customers.
Call customers prior to payment date
Consider calling your customer before the payment date to confirm the goods are all in order and that the invoice will be paid on time This can be particularly useful if the invoice is larger than normal or if the customer has a history of querying your invoices.
Follow up late payments
The longer a debt remains unpaid, the more likely it is to turn into a bad debt so make immediate contact when payment does not arrive on time. Be assertive but polite. Document your conversation and follow up on any promises made. Use collection services when necessary but ensure the cost of doing so is reasonable for the amount you will recover.
Cash outflows
Review and reduce costs
Review all elements of expenditure and ask whether the benefit to your business exceeds the cost.
Regularly compare prices
You will have seen advertisement for special prices to attract new customers, which can irk if you as a regular customer are expected to pay more! There is no harm in politely asking for the best price from your suppliers and using price comparisons where appropriate.
Consider alternative ways to achieve the same result
For example, in a seasonal business how can you restructure staffing levels to better mirror the timing of revenue? If you do need to maintain excess staff over the off-season, what other tasks can those people do that will add benefit to your business?
Maximise supplier credit terms
Many businesses require payment by the 20th of the month following invoice however some work on payment terms of 30 days after invoice. Don’t pay suppliers until you have to. Process two (or more) payment runs each month to take advantage of supplier credit terms.
Extend supplier credit terms
Some suppliers offer extended payment terms of sixty or even ninety days, allowing you to keep money in your cash flow pipeline for longer. Be careful however not to overspend and be unable to pay supplier accounts as they fall due, particularly if your business experiences seasonal fluctuations.
Control your stock
Sell slow moving stock, fashion or seasonal items at a discount, if necessary, to convert the stock to cash and re-invest that cash in more saleable stock items or use it to repay debt. Having cash tied up in slow moving stock items not only increases your businesses finance costs but also increases the warehouse space required.
Anticipate up-coming major costs
Some major costs are incurred annually such as insurance, ACC levies, annual licensing or subscriptions. In some cases, these can be paid by monthly instalments however a small financing cost may be incurred. If you opt for an annual lump sum payment, make sure you know when the payment is due and how much it will be so you can include this in your cash flow forecasts for the year.
Plan capital expenditure
Review your plant and equipment regularly and anticipate when items will need to be upgraded and replaced. Maintain an asset replacement schedule and incorporate the cost into your cash flow forecast.
Lease assets
Funding the acquisition of major fixed assets may put added pressure on the business cash flow. Consider leasing assets rather than acquiring them outright to spread the cost over the life of the asset.
Plan income tax payments
For most businesses, provisional tax is payable three times each year in August, January and May. In addition, if taxable income increases, you may not have paid sufficient provisional tax during the year and a ‘terminal’ tax may be payable to make up the shortfall. CT
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BUSINESS A DVISORS CH A RTERED A CCOUNT A NTS
YOUR ADVISORY EXPERTS IN:
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WWW.ACCOUNTING.CO.NZ (03) 343 4448 KENDONS@ACCOUNTING.CO.NZ 6 SHOW PLACE | CHRISTCHURCH
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About the company
Quality Building Services provides commercial and industrial air conditioning and mechanical and ventilation systems, including: • Design and installation • IQP inspections • Preventative and proactive maintenance services • Energy saving assessments and implementations • Project management services • Peer reviews • Fault finding and repairs • Electrical services. cooling, drying, ventilating or warming the space, yet still costly to run. QBS only uses systems from major brands like Fujitsu, Mitsubishi Electric and Daikin that have decades-long records of success in local settings and climates. The company ensures its staff attend all the latest training and education seminars provided by industry heavyweights and also conducts in-house reviews to monitor the effectiveness of the systems it uses. As proof of its commitment to improving the community’s quality of life, QBS has sponsored the Canterbury Rugby Union with its systems since 2012 and is one of very few companies who have maintained carbonzero certification since its establishment. From August 2017, QBS will be operating out of a new, larger premises in Wilsons Road, Waltham from where it can increase its workshop capabilities.
QUALITY BUILDING SERVICES LIMITED
Quality Building Services 3/308 Wilsons Road Christchurch (03) 365 8943 0274 381 440 eddie@qbsl.co www.qbsl.co.nz
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