Happy New Year! We hope you had a lovely Christmas break and are ready for 2024.
There’s a business truism stating that “a business can make losses indefinitely but can only run out of cash once“. Although I’m tempted to pull apart this statement to analyse the assumptions the essence of the statement is true, cashflow matters. And for many small to medium-sized businesses it matters a lot.
January can be a tricky period of cashflow instability as invoices often aren’t sent from late December until mid to later January and to compound this payment terms are usually 14 to 30 days. This results in a cashflow hole when rent, wages and other fixed overheads must still be paid while no income is being received. Failing to forecast the funds in November and December can lead to difficult decisions in January and February.
Fortunately there are several ways to maximise your cashflow:
Maximising cashflow
The predicted slowing of the economy in 2023-24 along with the payday super guarantee (SG) proposal are sure to make cashflow more important than ever for business over the coming months and years, noting that it is one of the biggest difficulties faced by business.
To recap, from 1 July 2026, employers will be required to pay their employees’ super at the same time as their salary and wages. Currently, SG is payable quarterly – allowing business more time to make provision for this obligation.
Reconsider the terms on which you deal with customers
If a customer regularly cannot pay, or can not pay the full amount, you should perhaps consider the terms on which you deal with that customer. For instance, to protect yourself against future non-payment, you might like to only deal with that customer on an upfront payment basis. Decisions in this regard should be made on a case-by-case basis.
Send invoices immediately
Delaying your invoices until the end of the week or the end of the month, for example, may unnecessarily create cashflow problems for yourself. When you make the supply, send the invoice!
Bank amounts that you receive (cash-based businesses)
By banking amounts as soon as you receive them, you will be better able to monitor your true cash situation at any point in time. Not banking amounts immediately leads to estimation and confusion as to the true cash position of your business.
Discounts for early payers
Offer discounts to customers who pay early. A word of caution – it is important to strike a balance between a reasonable discount, and your desire for early payment. Offering sizeable discounts for money that may have been paid in full a few days later anyway will cause its own cashflow problems! In most cases, it is best to keep the discounts small, and require the payment well before the due date.
Insurance for debtors
If you are a business that relies heavily on a few clients, you should consider taking out insurance. By insuring against the failure of your major debtors, you can safeguard against their potential collapse.
Increase your time to pay
See if you can extend due dates to creditors for payment, for example, from 14 days to 30 days; from 30 days to 60 days; or from 60 days to 90 days. Any extra time that you have to pay amounts owing is effectively interest-free money.
Consider charging deposits
Consider charging deposits for significant orders. Not only does this guarantee at least part payment, but also makes customers think twice before cancelling their orders for goods that are in the process of being made available.
Excess stock
Reduce excessive stock. Ideally, businesses should aim to have enough stock to keep customers satisfied and have strategic reserves for particular components that are susceptible to market shocks. All excess stock is tying up cash.
Prepare a cashflow forecast
We can assist with the production of this. A cashflow forecast allows the owners and managers the freedom to use excess cash for business development or paying dividends to shareholders.
Hope you have a great 2024!
