How profitable businesses can go bust

financial management How can a business making plenty of sales possibly go bust, you may wonder? The answer is cash. Your cash can be in a surprising number of places other than where it belongs - in your account.

Cash is often the reason so many businesses fail. Profits can’t be spent until they are collected and if you don’t focus on collection, your business won’t last very long.

Cash is the lifeblood of any business and if it isn’t flowing at the right place at the right time, it can cause real headaches for the business owner.

Getting cash into the right place at the right time means having it in your bank account for more time and not that of others. There are many places your cash can be other than in your bank account, such as:

Customers who haven’t paid you yet.
Suppliers you have paid too quickly.
Work in progress, i.e work not invoiced.

Let’s look at ways you could get the cash moving back into your bank account quickly.

Customers

The ones who owe you money are more important than those who don’t! It’s much easier to get money out of customers you have already sold to than new ones.

Many business owners feel uncomfortable about debt collection. If this is you, get someone else to do it. It may seem expensive but it’s much more expensive to have your cash funding other people’s businesses. To employ a part time Accounts Receivables clerk could cost as little as $200 per day. If done properly it could put much more than that in working capital back into your bank account.

Suppliers

Often, they get paid too quickly. You’ve heard the term ‘The squeaky wheel gets the grease” and unfortunately, many of us arrange immediate payment for a demanding supplier or worse still, we pay as soon as the invoice comes in.

This can play havoc with your cashflow. You need to use up all of the available terms and negotiate better ones if you can. It can pay huge dividends to spend a bit of time investigating other suppliers and better payment terms.

Work in progress

This can be a real hiding place for cash. If you have numerous jobs on the go , it can be very hard to manage them all to a point where they can be invoiced.

If you are trying to do this manually, or in your head without any process, it can cause you real headaches and cashflow problems.

A simple job management system can save lots of headaches. With a computerised system you have all of the information in one place about each and every job. You will know what work you have done for whom, and how long you spent on the job. You will be able to compare what you quoted on the job to what actually occurred. This puts you in a strong position to tighten up your quoting skills.

If you do a very quick estimate of how much money you have in outstanding customer debts, suppliers paid too quickly and work not invoiced, you may find it’s worth spending a little time and money getting these areas sorted out. It could put much needed money back into your bank account, not just today but for the future.

It could really reduce your headaches and sleepless nights worrying about cashflow. It could also reduce greatly your interest bill.

Sue Hirst is the founder of CAD partners (also known as ‘CFO On-Call’), a team of Financial Controllers who can help business owners grow their business safely.

12 comments | Add your own 1 2 | Next» View all»

I disagree with the suggestion of slow payment of suppliers - I am a supplier of services - so my customers would think of me as a supplier? I require payment on delivery or within 7 days for regulars. It's the only way I can keep my cash flow correct and I don't owe anyone any money. I pay all my accounts as they arrive - I reserve a small part of the day for accounts. My late father was a Chartered Accountant who always taught me to pay promptly and it would keep me out of financial trouble. He was correct. Because I pay so promptly, my suppliers treat me well and will get supplies or other goods to me quicker than normal or go the extra mile if I need something they don't have in stock.
Also, any job that goes over one month gets billed progressively regardless. Payment immediately. As a solo I cannot afford not to be paid on time and find immediate payment has contributed greatly to good cash flow and my own peace of mind.
I have dealt with other solos who require payment prior to services rendered, so it is not unusual. If everyone paid on time (customers and suppliers) we would all be better off with less resentment and less grinding of teeth!
On the issue of Job Management - I definitely agree with a good computerised system as it helps keep track of everything. Karen from Springwood NSW
I didn't read that the suggestion was to 'pay slowly' Karen, but rather to not pay unnecessarily early. Robert Gerrish from Flying Solo | Read my articles
It's all great advice, but probably the most valuable advice for soloists is to constantly keep a close watch on things. For example, the better we do, the bigger the GST monster when its due and let he/she who hasn't dipped into some of that when times are tough, cast the first stone! Grant Hyman from Sydney | Read my articles
Lets face it your CASH FLOW is the life blood of your business. I get very tough with slow payers to the point should they wish to continue doing business with me unless payment is within 7 working day they get hit with a premium, yes I increase my price by 10%. 'tis remarkable even with all the competition I have within the industry these customers still want to do business with me.
I have almost 500 regular customer that over the years I have educated to pay on completion of the work or within seven days.
Try it you may loose some but there the ones you dont want anyway patrick burgess from north ryde nsw
Well done Patrick!
As for client payments: I go by the saying, "Do unto others what you would have them do for you" - "pay bills immediately and expect the others to do the same". Makes for good cash flow. A new supplier sent me an account that said "12.5% off if paid within 7 days". I am happy to pay on time.
There is a scripture that says 'the worker is worthy of his/her reward' - and that requires prompt payment for services rendered. I find the larger companies are the main problem with cashflow - if they have been advised to hold off payment, then sometimes they think they can go 60-90 days. That doesn't bode well for solos for whom the job has long gone. The client company pays their employees each week - there shouldn't be any problems in paying for outside services on time either. I am a child of the fifties. I can remember my dad struggling to support our family when clients held off payment , and I have also been through times of genuine hardship myself when larger companies did that to me too. It can devastate you and almost make you lose faith in people and yourself. I totally disagree with the practice of holding off payment and will always advocate paying bills on time. And, there are plenty of businesses of whom I have used their services, who require upfront payment before they make an appointment. That can't possibly be considered 'unnecessarily early'. On the other hand, I have stopped working with clients who go by the 30-90 day system because they do not value the effort I put in for them. On tax matters, I have a separate account that I put my PAYG and GST monies into and I don't use it for anything else. I have done this every since I began solo twenty years ago (and we had sales tax instead of GST at the time). That is good advice so that you know you have enough to pay the taxman - and a bonus if you end up having money over.
Karen from Springwood NSW
With your tax account, if you also round up the savings to the next 100, and if you can manage it pay your GST/PAYG out of your cheque account, then you will end up with the funds saved to pay for your well earned holiday at the end of the year (or your ACC bill if a kiwi). Denise Maffey CA from Kumeu NZ

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