MANAGING CASH FLOW DURING COVID

Managing Cash Flow During Covid

Reading Time: 4 minutes

Cash flow is having the right amount of cash in the right places at the right time, every time. This cash can be sourced from a few areas, such as capital investment, borrowings and the like, but the main way you want to generate cash is from profits. 

As we all know, the only way to profit is by selling something for more than what it cost to produce. Profit is the difference between the amount a business earns, and the amount spent in buying, operating, or producing products and services. 

Profit is great, on paper, but if you have not collected the payments from your sales, even though your books will show a nice profit, your cash flow may well be terrible because you are still waiting for people to pay. To worsen matters, you probably have already paid for your stock and staff as you were making your sales. 

 

Here are ways for you to increase cash flow and reduce debt: 

 

Systems and Processes 

Robust systems and processes are the backbone of any great organisation with strong cash flow. Do you have any idea of who owes you and how much they owe you? You should be able to produce a report, down to the very cent. If not, make sure you have a proper accounting system in place. 

Slow paying debtors means more cash is locked-up preventing you from using it to pay your own bills and staff; this is normally the biggest contributor to poor cash flow. Debtors paying sooner will create a faster flow of cash so you can reduce your borrowings, or fund growth more easily. 

So, to increase cash flow quickly, make it simple for them to pay. Accept payment via as many channels as possible, ensure you have EFT (electronic funds transfer), take credit cards, cash, cheques, etc. Keep your invoicing up to date with an online accounting package that has a built in accounts receivable component, such as Xero. Have a dedicated, reliable, debt collection agency on call, as part of your accounts receivable process. 

 

Terms 

Do you have a credit application form? Clear terms on your invoices? Do you charge interest or penalty fees for overdue amounts? 

If you do not know about and support your own cash flow, why would anyone else care? Without clear payment rules, and you sticking to and enforcing these rules, customers will put their own cash flow first by letting amounts overdue to you stay that way. 

Consider carefully the length of time offered for payment of invoices. Are 60-90 day terms leading to matters being forgotten or falling by the wayside? A switch to a shorter period could ensure payment for your services is always a priority while injecting quick cash flow to your operation. 

Create and enforce very clear payment rules in your terms and conditions. Charge interest and a recovery fee and ensure this is made clear on your credit application forms and on each invoice. Make it known to debtors that delinquent matters will be referred to a debt recovery agent. 

 

Solvency 

Can you pay your bills as they fall due? If you are not able to pay your bills within their terms, then you are trading whilst insolvent and this is illegal in most countries. 

Cash flow is the main trigger of business failures, so it is critical to ensure you have sufficient cash at all times or face the harsh reality that perhaps you need to find another business. Keep abreast of you current cash flow state of affairs. Discuss this weekly with your bookkeeper, credit manager or accountant. Ask them what the current level of solvency is on a regular basis. 

 

Customers 

Choose your customers carefully and be very clear about what you expect. Get your collection agent to conduct a credit report on potential clients. Get them to fill in a credit application form. Do not be afraid to say no if you are not comfortable with the potential paying power of your new customer. Unfortunately, late payers are common and chasing them can be very time consuming for you, when you should be concentrating on servicing your quick paying customers. Maintain regular communication with your clients and have a working knowledge of any pain points they may be experiencing so can adjust any services or expectations accordingly. 

Be mindful of any changes in customer behaviour. Has a routinely punctual payer started missing deadlines? Are calls going unanswered? We touched on having your finger on the pulse of your own organisations financial position, solid lines of communication will give you an understanding of your customers position, allowing you to make informed decisions about continued business or credit extensions 

 

Finances 

Get a first-class bookkeeper/accountant and pay them well. Great forecasting of cash needs and informed decisions will help you stay within your cash capabilities. The easiest way to do this is to have a budget, ensure you use that to create a cash forecast and carefully monitor how you are progressing against what you predicted. Even for a tiny business, creating these tools is vital to both manage cash flow well and to help secure finance if needed. 

 

Staff 

Payroll is usually one of the largest cash requirements, so being aware of your staffing needs on a day-to-day basis is to a great way to improve overall cash flow of the business. Think about commission-only payments, rather than salaries. If you pay bonuses, always link them to KPI’s and performance. 

Do not pay someone to do your debt collection when you can outsource this to a professional. Have your staff concentrate on what they do best, servicing your customers, not chasing up debtors. 

 

Creativity 

Speak with clients and senior leadership in your organisation regularly and seek their input. They could be sitting on ideas to boost your cash flow that you haven’t thought of. Is there a new service that could be offered to clients at little or no cost? Are there value add activities that will keep you at the forefront of your clients mind. Innovation does not always have a cost attached to it and being open to new ideas can open new streams of revenue. 

 

If you require any legal assistance or would like further information regarding this topic, please feel free to contact our team for advice on 1300 799 820, or email them at email@adclegal.com.au. 

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Email: email@debtrecoveries.com.au

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