Small businesses are very vulnerable in tough times. In a tough market it is probable that everything will slow down. Debtors can pay less quickly, turnover can fall, cash from profits may reduce and your bank may be less inclined to lend. In short, cash is limited. This is a little different to the recent past as many businesses didn’t really keep a very close eye on their cash. Now all that has changed with the Coronavirus on everyone’s mind.
Proper planning and being proactive can help you weather tighter economic periods and allow you to continue to thrive. Make sure you have a clear picture of your payroll, and any other planned expenses that will need to be accounted for. When sales slow, there are still overheads and salaries that need to be paid. Then there are the ATO obligations and the bank requirements.
Budgeting in this critical time is so important and will really help you plan your cash flow.
Budgeting will help you run ‘what if analysis’, such as what happens if our sales drop by 20%, 30% etc or our collections become 120 days instead of 60 days etc?. What will our cash flow look like? This is all very important in this time.
If there’s even a possibility that there could be a shortfall, it’s essential to meet this head-on. Whether this means speaking with your suppliers, creditors, your bank or the ATO to figure out an arrangement, or compromising on other business outgoings, you must make a plan to ensure that the business, or your staff, won’t suffer.
5 Strategies to minimise the stress of Cash Flow
Invoice early – Send any invoices that you can, and in advance if possible. Perhaps consider whether you have any regular clients or customers that you could offer a retainer or similar deal to if they book services or make a purchase from you in advance. Include a letter or a note informing customers you understand times are tough and you are happy to work with them on payment terms but there must be constant communication.
Chase payment – Use this opportunity to chase up any outstanding payments. Strong communication and relationships matter – talk to clients and chase invoices. Work with them to ensure we all get through this period. Also, resolve any invoices with queries as they will not get paid if there are queries on them.
An in depth look at accounts receivable may enable strategies to be developed to reduce debtors days outstanding or bad debts. You could look at tightening credit terms for particular segments of customers, increasing sales focus on customers with good credit history and offering prompt payment settlement discounts.
Talk to suppliers – A little honesty can go a long way. Perhaps they can extend a line of credit for your payments to them. In most cases, a good supplier would rather offer a little flexibility to keep an ongoing business relationship. If they are unwilling to help then you could look at switching suppliers with more favorable (longer) credit terms or rationalizing suppliers to reduce administration costs.
Review Inventory – Can you find a cheaper supplier locally to avoid the shipping costs or discuss alternative products that allow you to reduce expenses?
You could look at ordering processes that may identify opportunities for more (or less) frequent ordering of inventories, to smooth out cash payment requirements. Obsolete or slow moving stock should be rationalized and converted to cash and sales should be focused towards faster moving items.
Review your costs – It is also a good idea to conduct a general review of expenses.
Business costs can creep up when times are ok or good. In tougher times/conditions this will require much more focused cost management.
Review costs as follows:
- Expenses by category
- Payroll by name
The 3 reports contain overlapping information but the different arrangement forces you to look at your costs from multiple perspectives. You could generate the reports from the past 12 months.
You would be surprised that there are a few lines that you could reduce or remove completely. It is a big deal if you reduce 5% of all expenses.
It’s a great idea to make a time to check on your expenses regularly, no matter what your financial situation. Review all of your regular payments and subscriptions as well as upcoming costs. There may be travel, functions or purchases which you can decide on an alternative approach to.
Talk to the bank or the Tax Office – If cash flow is tight, make sure you have conversations early so you have everything in place to see you through. If you are paying principal and interest on loans you could look at converting the loan to an interest only amount or obtaining an overdraft or a larger overdraft. You can always go back to principal and interest when the situation gets better.
Remember, be ready for the opportunities – they will come, you just need to be ready to go.
What are you doing at the moment to get ready?
What are you planning to do moving forward to be ready?
We know that some businesses will do nothing or expect things to happen and they unfortunately will struggle to survive. They will sadly fail. Other businesses will just follow what the Government and others are saying and they will survive but be 20% – 30% smaller than what they are now. Then there are the pro-active businesses and business people and they will ensure that they have cash reserves, they will keep marketing and they will focus on growth and when the recovery comes they will fly.
If you want to be the pro-active business but need help in getting started or in refining your strategy, then let’s talk. My number is 83643488 and would love to chat with you about we can help you be ready to take off when the good times return.