As 2021 drew to a close, Australians are quietly thankful we are out of lock down, businesses are operational again, and the economy is officially out of recession.
So what should you be considering in 2022 is one of the top priorities for your business? Cashflow!!
Below are 5 strategies to help better manage cashflow within your business.
RISK MANAGEMENT – Know Your Customer (KYC).
By creating a credit file on your customer before engaging in business with them is one way to assess your appetite to work with them and on what terms.
Implement application forms for your customers to complete, helps you check the creditworthiness of a business. Within this form, a clause around undertaking credit checks is advisable. Credit checks can be completed by signing up to a credit agencies, such as Equifax, or ask your lender to do this for you if the credit limit you are considering is sizable. Credit checks help you ensure you know who owns the business, and if there is any negative credit history attached to this business.
Director guarantees should be considered as part of the application form, which enables you to pursue the directors in the event they do not pay non disputed invoices.
Your company’s terms and conditions should be clearly stated on the back of the application form.
Lodging your security interest (on the PPSR) over your customers business for the stock or product you have provided them can assist in recovering these goods should the customer fail.
Fraud does occur in the business community hence asking your customer to provide proof of their bank details should also be considered. A bank deposit slip with the business name and bank details enables you to double check that your payments are going to the correct entity.
2. DETERMINE YOUR CREDIT & RECEIVABLES MANAGEMENT PROCESS
By determining who you will or will not extend credit to and running credit checks on all new and non-cash customers before you agree to sell to them on credit, helps reduce bad debt since you should be offering credit only to customers who have proven they can and will pay you; but that is only the beginning. A robust collection process, that is strictly followed, is also key to ensuring you review your customers on a weekly/monthly basis. Directors should review their receivable ledgers monthly, and not leave this responsibility solely to their CFO or accounts team. Stay informed!
Where to start…..
- Create a solid paper trail. g. Purchase Order, Signed/dated delivery docket, Invoice and send End of Month Statement. This will assist in handling any customer disputes outside of damaged stock, and support collection follow-ups or legal action for non-payment.
- Stay on top of invoicing. Invoice as soon as the job is complete or product delivered. This includes progressive invoicing for staged contracts. Invoice the right person, so it doesn’t get lost in a shuffle from department to department. Design your invoices so they are easy to read, with key areas like due date, amount due, purchase order number, highlight payment methods; and finally emailing invoices instead of mailing them.
- Ask for deposits or partial payments on large orders or long-term contracts. Charging this way, the company generates enough cash to finance the materials and pay the workers needed for the job.
- Penalties/Stop Supply – Develop clear and consistent guidelines for your customers. Make sure invoices are clear about any and all payment terms and penalties for late payments. Whilst penalties for late payment are not a great fit for every business, it may be for yours. An alternative is to consider implementing a strict credit policy whereby customers are put on stop supply if payments are more than 7 days overdue and possibly converting their account terms to COD.
- Setup a collection routine. Once the end of month statements are issued, you then need to follow up payment. Implementing a consistent collection procedure will not only enable you to quickly identify any disputes, but also understand any cashflow pressure your customers may be subject to. This will also highlight to your customer they will receive collection phone call/s and potential stop supply, if payment is not received.
STOCK CONTROL & SUPPLIER TERMS
Gone are the days where many businesses need to hold a significant level of stock. Most industries have a choice of suppliers, both domestic and overseas. By not relying on one supplier enables a business to assess how much stock they can hold, based on proven speed of delivery from their suppliers.
Regular checks on supplier costs with others in the same market can help your negotiations on costs per unit or on a volume basis. Ask for a discount if you pay earlier than their credit terms denote, or if you are buying in bulk. For established long term relationship seek extended terms. If you have proven to be a client who pays on time, there is no harm in asking.
Do you have inventory that’s becoming obsolete? Consider selling it to generate quick cash.
GET A BUSINESS LINE OF CREDIT
A business line of credit is a good insurance policy against cash flow problems. You may be able to get a line of credit for a percentage of your accounts receivable, a trade finance facility to fund your supplier payments, overdraft or short term (at call) loan.
LEASE EQUIPMENT INSTEAD OF BUYING IT
By leasing vehicles, computers and other business equipment, you get access to the latest features and avoid tying up cash—but you still get to expense the lease costs on your business taxes, and take advantage of the government $150K instant tax write off.
The best run and successful businesses, both big and small, have very good cash flow management procedures in place. So make cash the king in your business. Take steps to manage your businesses cash flow, to protect your precious Aussie business you have worked so hard to build.
Contact PFBS ‘s business advisory team for assistance on your 2021 cashflow strategies.