Keeping your cash flow flowing

By Amanda Ellis

Poor cash flow is the number one reason why businesses fail. Cash flow is the balance between your income and your expenditure. When these get out of balance, or your timing is wrong, your business is drained of its lifeblood.

Planning your cash flow is essential. It enables you to plot the expected cash needed to operate and grow your business, warns you of any periods of cash flow difficulty and ensures that you don’t put your company at risk.

The impact of tax reform
Over the past 18 months tax reform has had a significant impact on the cash flow of many businesses.

There are a number of reasons for this, including the effect of the GST on consumer behaviour and the capacity of businesses to manage the change. For many, the biggest problem is that tax payments have been brought forward into one consolidated period reported on the Business Activity Statement.

A major issue is that many businesses fail to segregate the GST they collect from their income and expenditure.

It is all too easy to fall into the trap of spending the GST collected from customers in the expectation of a major sale or contract coming to fruition. If the sale doesn’t come through, the business has no way of paying its tax bill.

Controlling your debtors
If you have customers who are slow to pay bills, it is essential to bring them into line. The sale is not complete until the money is in the bank. The area of greatest sensitivity and an indicator that you have a problem is when debtors extend beyond 45 days.

If you use accrual accounting for your GST reporting, late paying customers are more than just annoying, they’re downright dangerous.

The GST due on your sales must be remitted to the tax office either every month or every quarter (depending on how you are registered), regardless of whether your client has paid the bill or not. If your customer doesn’t pay, you could be out of pocket.

It is a good idea to review your credit arrangements and put in place a strict payment system. This way, your customers will be in the pattern of paying on time before you need to remit the GST.

Make sure you have a systematic and strong follow-up system and insist on cash on delivery for consistently late payers. Also, be prepared to say ‘no’ if there is a risk of not getting paid.

Who’s at risk?
Businesses with a tight cash flow, undercapitalised businesses and businesses with poor systems are at risk. This is because they do not have the internal capacity to fund any unexpected cash flow problems.

Another risk area is when businesses are profitable and growing quickly. Growth in your business requires more cash to fund associated expenses.

Twelve tips to keep your cash flow flowing

• Plan and monitor the cash flow your business will need.
• Segregate your GST so that you always have the money available to pay the tax.
• Put in place procedures to record credit sales, payment and when payments become overdue.
• Have a fixed strategy to deal with overdue accounts.
• Ensure your trading terms are clear, well documented and communicated to your customers. These should be displayed simply and boldly on invoices and account statements.
• Ensure invoices are issued and delivered to customers promptly.
• Monitor your results, including the promotion of dispute accounts and length of outstanding accounts. This will also allow you to identify better business practices.
• Don’t disregard small accounts as they do add up. A simple system of regular follow-up of outstanding accounts should be implemented.
• Don’t threaten legal action unless you intend to follow through.
• Consider offering discounts for early payment.
• Insist on cash on delivery for consistently late payers.

Amanda Ellis is an economist who specialises in international trade and development economics, previously working at the OECD in Paris and the United Nations in Geneva. Amanda is now Head of Women’s Markets and National Manager for Women in Business at Westpac and is dedicated to educating women to become financially independent. For more information regarding your financial issues, please phone (02) 9226 3352 or visit www.westpac.com.au/womeninbusiness