How to improve your cash flow in 31 days

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How to Improve Your Cash Flow

in 31 Days

Prepare for business risks and opportunities by staying on top of your cash flow situation. This August, instantly boost your commercial prospects with Ezypay’s 31-Day Cash Flow Challenge.

Make sure you know your current financial position

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01

As a business owner, review all business expenditure and income on a weekly basis. Delaying your weekly reviews will make it harder to tweak your operational expenses and will cost you much more in the long run. If you are in a bit of a muddle or don’t really understand these things, do ask someone for help. You’ll be surprised by how many people would be happy to give you a hand.

Bills to be paid

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02

Money owing

Expenses

Income

Make sure the price is right and you are covering your costs There is no point being in business unless you are at least breaking even. Above that making a profit is a fantastic feeling! How do you know what the right price is?

You have to understand your cost to deliver your service or your product. This will include things like phone calls, design, time, internet connection, electricity, rent, wages, and any other fee to do business. Now divide all of these by the number of products you have and you have a cost of sale. This is your breakeven point.

Now how much profit do you want or need to make? This is generally as a percentage.

Put that onto your cost of sale and you have the price that you should be charging.

Sell your products at this price and you will be making money.

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Reconcile your membership income on a weekly basis Who has paid and who has not? Gym entry is always a tricky situation for the member and the staff when discussing non-payment issues.

It’s essential to make sure that you know who has and who has not paid their membership on a regular basis. With direct debit payments being the main source of membership income you need to reconcile each member’s payment as they occur to ensure they are up to date.

If you fall behind on your reconciliation, it soon becomes a mountain to climb as members are often not aware that their payments did not go through - especially for reasons such as a newly expired credit cards or banking transaction failure.

Avoid that uncomfortable entry situation; do a regular weekly check to make sure your business is healthy and your members are happy.

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04

Reduce non-core expenses This is a great way to increase your cash flow, but you must understand the difference between core and non-core expenditure. Basically, core expenditure refers to essential day-to-day expenses like utilities, rent and wages. On the other hand, non-core expenditure are expenses un-related to running the business everyday, such as insurance, travel costs and beverages. These two expenditures are also often referred to as direct and in-direct costs.

Although insurance is a non-core expenditure, it is still essential – so your aim is to reduce these expenses, but not necessarily cut them out entirely!

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05

Carefully budget payments for essential expenses An example of essential expense may be rent, insurance or employee wages.

Carefully plan for these expenses and make sure that you have the cash to cover them. For example, if you pay your employees every fortnight, do you know that some months have 3 fortnights? By carefully planning and budgeting for these essential payments, you will understand what cash you need when and will also know the amount of cash you have leftover for other business activities.

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Keep stock levels to a minimum Holding stock in your business is like having cash sitting on your shelves. You need to constantly monitor stock levels and ensure that you do not hold any excess or outdated stock. It may be a good idea to ask your suppliers if you can have the stock without paying for it until it sells – so you can either sell the product or return it thereafter. This is known as a consignment sale.

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Set your credit terms carefully Focus on reducing the time between making a sale and putting money in the bank. You can track this and aim to reduce it by a couple of days. You can also negotiate shorter terms of trade with key customers or offer discounts for fast payments. If you are paid by credit card or electronic funds transfer, you will also receive the money faster, compared to waiting for cheques to clear.

If you have recurring payments to be collected, create a direct debit account so they are automatically debited and the money is seamlessly transferred into your bank account on a regular basis.

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08

Plan for lumps and bumps Be aware of periods when lean cash flow patches are coming up and plan accordingly.

Avoid funding major purchases from your business’ working capital unless you are 100% super that you have the cash to cover it.

Have a good understanding of when your high buying times and low buying times are.

Analyze your year-on-year income and you’ll be able to map out the peaks and troughs, from which you can then plan for your business spending.

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Pay your creditors strategically Heather Stone, Owner of You’ve Been Promoted shares “My number one tip is never look at your cash flow position as “bad”. Instead view it as a great position to be in for a growing business – it allows us to deal with it better!

We then break invoices into business related expenses – eg, rent, wages, phone, adverts, marketing, etc….to pay 1st, and suppliers 2nd. And people that keep bothering me 3rd!!!”

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Are you addicted to lump sum revenue?

Justin Tamsett, Chief Comfort Zone Challenger at Active Management states “By definition an addict is someone who is abnormally tolerant to and dependent on something that is psychologically or physically habit-forming. It may even be an abnormally high craving. For many health club owners and personal trainers they become addicted to cash!

Pre-paid memberships and multi-pack PT sessions are cocaine for a fitness business. You get a massive high as you watch the cash come in. And you become addicted to this cash, as your spending more often than not reflects the amount of cash you have. So to top up the bank account, you run another offer to gain more cash. The more you get the more you spend the more you need more! Sounds like a drug.

For long term sustainability in business we need cash flow and not cash injections. Grow your weekly, fortnightly or monthly direct debits with a strategic plan and you will not require injections. Remain disciplined and focused by setting daily, weekly and monthly targets to hit in regard to debit growth.

If you want to improve any number in business (in this example we are talking direct debits), you need to know what that number currently is and what you want to get it to. Then every decision you make in business, ask yourself “Will they help or hinder me changing my debit number?” If it is the latter re-think the decision. And of course, when you do shift the number positively, celebrate your success, as we do with all goal setting.”

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Don’t incur tax and other statutory penalties This is an easy way to save money. After all, why give it to the taxman when you don’t have to?

Make sure you are regularly doing your tax returns and fulfilling any other statutory obligations you may have. The easiest way to do this is to not let the administration of this process get out of control.

Is there a time of the week that you are at your least productive? Mine is Friday afternoon at about 4pm.

During this hour of the day, I always clean out my inbox and also clean my desk. What this means is that I have a clean inbox and a fresh to do list for Monday morning. I also have a clean and uncluttered workspace so when I come in on Monday, I feel in control and ready for anything.

Why don’t you dedicate an unproductive time of the week for financial administration? This way, you’ll have everything ready when tax season comes around, you won’t be late and won’t have to give away even more hard earned money than you need to.

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Send invoices on a daily or weekly basis Do you need to send out invoices to collect fees for the services that your business provides?

Lots of businesses collect their fees on a daily or weekly basis because there is simply no good reason to extend the time to collect your fees at all. If you want your clients to pay your bills sooner, you have to show them that it is important by sending out your invoices on that very same week or even on the day services is rendered.

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Invest spare cash in a high interest account If you currently have cash that you aren’t using immediately, I hope that it isn’t sitting in your business bank account. If it is, you are currently earning almost no interest on that money. There are a few providers (like ING Direct and Bank West) who offer high interest and fast access savings accounts.

While having to go to a bank account to open another account may seem like a hassle, another way to look at it would be that it is a good investment of your time in the long run.

Alternatively, some of you may not have the “spare cash”, but you might have large amounts of money that you collect from members or customers at different dates of every month. Some Ezypay clients are in this financial situation, and we offer added services of helping our clients deposit these large chunks of money into high interest savings accounts so you can earn extra income from the interest.

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Be really stingy and eradicate unnecessary expenses This is not about cutting back on non-core expenditure – it’s about not making unnecessary expenses at all.

A non-core expense is something that is not necessary for the running of your business. This includes things like tea and biscuits. Stingy is good! Keep those purse strings tightly closed.

Imagine that your life or even your family’s lives depend on it.

If you spent $100 a week stocking the fridge with tea, milk, coffee, sugar and biscuits, you’d be spending an equivalent of $5,200 a year just on hot beverages and snacks.

I once went around our office and asked everyone to donate the stationary they weren’t using.

I added up the cost of the same stationary if I had purchased it and it was a cost of $750. So all of this stationary collected such as pens, paper clips, rubber bands, staplers etc. went into the cupboard and we saved the $750. We also did not have to make any stationary purchases for another 3 months.

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Get finance products working for your benefit Overdrafts, premium funding, lease facilities and cash flow funding products can all be excellent tools to help match a business’ cash supply with planned outlays. Even the business credit card can be a good way to ease the squeeze as long as you are sure the debt can be paid before interest kicks in. Loans from various financial institutions are often necessary for covering short-term cash-flow problems. Revolving credit lines and equity loans are types of credit used in this situation.

There are many businesses that are currently not taking pro-rata. They go through all the hard work of negotiating with the prospect on a sale price, the sale is accepted and then the business discounts the customer’s fee when they are actually processing the payment details.

The customer never asked for this to be removed and it’s a lost opportunity of income.

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Don’t forget about pro-rata payments Amanda Bracks from Bracks Consulting states that, “There are many businesses that are currently not taking pro-rata. They go through all the hard work of negotiating with the prospect on a sale price, the sale is accepted and then the business discounts the customer’s fee when they are actually processing the payment details. The customer never asked for this to be removed and it’s a lost opportunity of income.

Pro-rata is the amount of money owed before the next debit is due. Many sales people seem to waive the pro-rata, assuming that the payments can simply start on the next debit. It is very important to the business to retrieve all funds owed for the purchase, including the amount owed before the first debit is due.

Working out the pro-rata is simple. Just divide the debit amount to get a daily amount.

For example, if your services are $89 a month x 12 months and divided by 365 days, your pro-rata total is $2.93 per day.

If someone had 10 days before their debit is due, they owe $29.25 to get started (plus relevant joining / admin fees). If you sell 100 units per month and your pro-rata is roughly $29.25 on average – that’s $35,100 extra income per year (i.e. money your staff are giving away now for no reason).

Ensure that your staffs are disciplined enough to consistently collect pro-rata on every unit sold, either at point of sale or debited out of their account on first debit.”

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Spread out payments over a reasonable timeframe Business Victoria recommends that, “Rather than insisting on payment upfront, businesses should work out how to spread payments over a reasonable time span, ensuring regular cash flow. Customers appreciate spread out payments, and are less likely to default on payment mid-project if terms are more manageable.

Of course, one of our cash flow tips is about allowing customers flexibility with payments. We see many businesses benefiting from using our direct debit payment solution. Not only is this a cash flow solution, it is also good for sales and retention.

At Ezypay, we offer a direct debit gateway that allows your customers to initiate their own recurring payments from their bank or credit card, allowing you to accept sales via direct debit without even getting out of bed.

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Do a cash flow projection It’s important to do a cash flow projection for cash management. This tells you how much money will be coming into and out of your business, allowing you to plan for the future.

Do not confuse a cash flow projection with a cash flow statement. The cash flow statement describes cash flow activities that have occurred in the past. The cash flow projection shows the cash that is anticipated to be generated or expended on over a chosen period of time in the future.

A cash flow projection will not in itself improve your cash flow, but it will help you understand and manage it better.

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Bring in the professionals If you don’t have the skills to do your own accounting – and let’s face it – not every one of us does or wants to – then you need a professional. A good accountant will be worth every cent you pay them.

They will be able to see what’s missing, offer short and long term solutions and suggest various reports that will benefit you. They are a major resource in every successful business.

There are lots of great accountants out there, which you can oftentimes find through referrals. Ideally, find one with experience in your industry and do choose carefully. Finding one that works well with you, your business and has industry experience is key. A good accountant will undoubtedly cost you money but they should also save you from being a victim of poor cash flow.

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Make more sales Making more sales is a sure fire way to increase your cash flow.

More sales equals to more revenue, more revenue equals to more cash flow. More revenue can be just as important (if not more!) as decreasing your expenses.

So what are you waiting for? Get out there and sell, sell, sell!

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Do you know the difference between a balance sheet and profit & loss statement?

The error many people make is to focus on their businesses profit and loss statement to the exclusion of all else. It’s a potentially fatal mistake because healthy profits can mask a cash flow crisis.

Generally, profit and loss statements do not contain the information required to make an adequate cash flow projection. To get a better understanding of your business cash flow, you must start with a properly structured balance sheet that contains all the details, from inventory and debts to interest costs.

You must know and understand the numbers. Business owners often think that’s what their accountant is for, but they couldn’t be more wrong. Only with a comprehensive balance sheet in hand is it possible to construct a useful cash flow budget (also known as cash flow projection). This vital document is a “best guess” at a business’ cash inflows and outflows over a period of time.

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Get another quote or two When it comes to buying new supplies, investing in capital items or getting major renovation done on properties or machinery upgrade, it’s always prudent not to rely on only one quote.

Always look at the first quote as a benchmark and get at least two other quotations from other vendors or suppliers.

Once you have 3 quotes, ensure that all three are quoting based on the same brief. At the same time, it’s also good practice to let each supplier know that you are obtaining additional quotes so that they provide better quotations for your business as well.

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Discount…but only for profit One of the best forms of increasing sales or closing a sale is to discount your product or have a sale.

Ensure your original price always has enough leverage to discount it enough to be attractive to close the sale or run a sales promotion. You should do this at the outset of establishing you price. Your pricing formula should include: cost of goods, profit margin, GST and now sale margin.

It is also important to plan your sale so you link it to the buying cycle of your industry. When are the traditional high and low buying times for your product or services and what are your marketing philosophies around offering discounted pricing at the high buying time or the other way around?

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Regularly complete an expense audit Roxana Olivares, Director Programs of The Forum Sport and Fitness shares, “We all work in extremely busy and demanding industries. It is easy to get caught up in the day to day and let your business continue running the same it always has. This means regular expenses just keep on getting paid, no questions asked. Here are a couple of examples that can save you some money: Did you know that by shaving one hour per week off your rosters can attribute to a saving of approximately $1000 per year? Make sure you are regularly checking your rosters in line with your business needs. It may also help to have some targets for the different periods throughout the year. Our business is broken up into peak, off peak and shoulder periods. This is a quick reminder to check rolling rosters and reduce hours here and there when not needed.

Do you really need all your phone lines? After a recent audit, we identified two phone lines we were paying for that was used for old EFTPOS terminals. No longer requiring these phone lines and cancelling them from our contract has meant a saving of over $1500 per year!�

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Make someone responsible for debt recovery Rowan Brown, Director of Recovery Partners suggests, “Debt recovery needs to be a priority in your business. If you (as the owner) are too busy to do this yourself then you need to make someone else responsible for it. And make sure they know that it is their priority!”

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Understand the impact of payment cycles on your business Rohen Burton, Chief Financial Officer of Fit n Fast suggests, “Cash flow projections are most commonly prepared monthly. However, not all payment cycles are monthly. For example: Billing might be weekly or fortnightly Wages can be fortnightly and/or monthly Rent is usually paid a couple of days in advance You may have quarterly charges Even if you are projecting a profitable month, the timing of payments at different times during the month may result in a cash outflow that you will need to cover.

Consider setting up an overdraft facility with the bank for these situations.

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Use Pareto’s 80/20 Rule Rohen Burton, Chief Financial Officer of Fit n Fast suggests, “When reviewing the cash flow reports or producing cash flow projections, use Pareto’s 80/20 rule. Spend your time on the most important cash impacts of your business. For example: 80% of your revenue comes from 20% of your customers or products 80% of your expenses come from 20% of suppliers or cost lines Concentrate on these areas of the business for the biggest impacts.

The Pareto principle (also known as the 80-20 rule, the law of the vital few, and the principal of factor scarcity) states that, for many events, roughly 80% of the effects come from 20% of the population.

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Set up a US dollar bank account Rohen Burton, Chief Financial Officer of Fit n Fast suggests, “If you purchase from overseas suppliers (for example, the US) consider setting up a Foreign Currency bank account and plan to buy some currency when the rates are favourable. Don’t exchange more than you need and make sure your AUD cash flow can handle having this amount off sitting in another account. In2011, there was an opportunity of saving over 5% just on exchange rates alone if they were booked at the right opportunities.”

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Collect bad debts ASAP Maybe it’s obvious, but do try to collect bad debts or failed payments as soon as possible and always target the low hanging fruit first. The highest collection rate for failed payments is immediate and then the rate of collection falls for every day that goes by. Luckily at Ezypay, our clients enjoy a collection rate of 99.5% for all transactions.

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Growing a business using 3 to 5 year projections If you are planning to grow your business, create cash flow projections for 3 to 5 years out. Once you have a base projection, save a few copies so you can do “what-if” scenarios. What if I borrow more money now? What if I raise more capital? What if I speed up/slow down growth?

These questions will help you stay better informed and make decisions based on relevant information.

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Ways to find hidden money in your business Most businesses have a hidden source of extra cash right in front of them. Here are a few ways to find that hidden money.

1. Rent or sell off unused space If you have some empty space that you are not using wouldn’t it make sense to lease this out? If you really don’t need it, you could consider selling a concession for it. It is far better that the space is used by somebody else rather than just left doing nothing.

2. Rent wall space to advertisers If you have some empty wall space outside your business, you could consider renting this out to advertisers; check with local laws first before making this move, though.

3. Temps and Freelancers If you don’t have enough work to keep all of your staff productive, you might be better off letting them go. You might also consider hiring some freelance workers that you can use when you need to. Having less full time workers will also mean that you won’t have to pay so much on employee benefits and office equipment that they would need if they were with you all the time.

4. Lease rather than own Consider leasing rather than owning assets. It is important that you do a cost benefit analysis to see if it would make more financial sense for you to lease rather than own assets. Keep in mind that if you lease, you won’t be able to claim them as a business asset.

5. Rent out unused equipment If you have any equipment that you don’t use all the time, you should also consider renting this out during low-peak season.

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