The saying “cash is king” is well known. For anyone who has been kept up at night wondering how to meet this week’s wages, this article is for you.
Cash can hide in several areas in a business. The places to look include:
- Is your invoicing erratic and/or not covering all your costs. The costs associated with the work being invoiced has been paid for by you – and you carry those costs until your client/customer has paid.
- Your debtors or accounts receivable balance. How much is outstanding from more than 30 days ago? How often have these people been called? Are you still doing work for late payers?
Ideally your debtors will all pay you within your requested timeframe which is usually no longer than the 20th of the following month.
- Your stock holdings may be increasing. Most businesses try to hold stock levels which meet the sales demands of a few months, and no more. If the stock comes from overseas you may need to hold sufficient stock to cover three to four months of sales which allows for the longer import time. If your stock levels are sufficient to meet six or more months of sales, you have tied up considerable cash to buy the stock.
- Personal expenditure or drawings. Does the business pay your personal insurances, food costs, mortgage payments and other personal costs. If the personal costs exceed the cash surplus generated by the business, the business bank account must cover the difference.
- High debt reduction levels. Repaying debt (business or personal), requires cash. Loan repayments are not a deductible cost – we claim the interest, but not the loan repayment. If you find the bank balance under pressure, compare the loan repayment commitments to your monthly cash surplus. The loan repayments may be too high for business to manage.
- Paying tax. No one’s favourite cost but approximately one third of the profit needs to be set aside for tax. GST is 15% and company tax is 28%, so regular savings towards tax helps a business owner meet tax obligations as they arise.
Tight economic conditions often put businesses into a “cash crunch”. To assist consider the following:
- Ensure you are invoicing for your work regularly. As soon as a job is complete, or sale concluded, invoice the client. If you have a larger job which runs for some time, agree in advance to a regular invoicing schedule.
- Use a good software programme to capture all costs involved in providing your service or selling your product so you can ensure you are on-charging all costs, plus your profit margin.
- Manage your debtors closely. Start contacting debtors when they are overdue by a few days. If they are struggling to pay suggest a repayment plan and monitor their payments. Stop work for late payers and ask for the payment upfront for those that make a habit of paying two or more months after the debt was due.
- Work out how much stock you need to hold to meet sales demand for a month, plus delivery times to replace the stock, and limit the stock you hold to that amount. If suppliers can get you stock within a month, then aim to hold one to two months only. If you are holding old stock that isn’t shifting, try to discount it or consider using some of it as a promotional “giveaway” to move other items.
- Monitor your personal expenditure out of the business. Consider limiting your personal expenditure to one regular payment per week or month. We can help you work out what that amount should be. Drawings is one of the most frequently overlooked areas of expenditure for business owners.
- Work out how much debt your business repays each month and compare that to the cash surplus the business is generating. Ensure there is sufficient surplus to cover the loan repayments. If there isn’t, then contact the bank and explore reducing your loan payments for a period until the business is generating more cash.
- Go through your business expenses. Are they all necessary? Is there some optional expenditure you can cut which won’t negatively impact your sales? When times are good, its easy to have the latest vehicles, new gear, and plenty of social events for the team. In a tight market like today, consider holding the existing vehicles for a year or so longer than previously, making sure the business equipment is carefully looked after so it lasts, and hold a few less team events. People understand that sometimes the purse strings must be tightened.
- Have a regular savings plan to set funds aside for tax, asset replacements and any other large purchases you know you will need for your business
Good cash management practices are often implemented due to necessity. If you can maintain them in the better times as well, then you will see your savings grow.
