Cashflow is the biggest killer for small to medium businesses and it’s also the one thing that keeps most business owners awake at night. Because we are nearing 30 June (the Accountants Christmas) and BJT is close to celebrating its 4 year old birthday, I have decided to put together a 3 Part “How To” Cashflow Masterclass so click the video and get watching:
So we are starting to reach a couple of milestones both for myself personally, and for BJT, so I’ve decided to put together a 3 part series on cashflow and the reason that is is because that’s the biggest problem I find with small to medium businesses whether they are turning over a couple of hundred thousand dollars per year pr doing multi-millions, cashflow is a very big problem, a very miss-understood problem, so what I want to give you is a lot of the tips and tricks I use and some of the strategies I use, but also where you can go now and look.
The reason the timing is quite interesting is because we are coming up to 4 years of having BJT in existence which is pretty exciting. I know 5 years is the big milestone because almost 50% of small businesses fail in that time so its good to see that we are still around. It’s also 12 months since I’ve been blogging.
For those of you that are a part of our newsletter or follow our blog, its been 12 months and a lot of businesses struggle to keep that commitment and it also shows in other areas of their life as well, so that’s something I’ve managed to stay committed too. I have to give a lot of thanks to Quila from Discover Coaching for helping me out in the initial days and cracking the whip because I definitely needed it and it’s one of those things, once it’s part of your routine, you can keep yourself accountable but it’s always good to have someone there to keep you on top of things.
Also you might know, especially people that have known me a little while, is that it is 6 months since I’ve been growing the beard, so that’s gone quite quick and for all the gentlemen out there, they will know that to put something together like this, there are a lot of ups and downs, and a lot of headaches involved, but it’s a little bit of fun so let’s see where it takes us.
So let’s jump straight into what we are talking about today. It’s going to be a 3 part series,:
- the first part we are going to be talking about some of the common areas where our cash is tied up at the moment and you can look at that right now.
- the second part is going to be some specific areas in the business, especially when you have a look at the profit and loss, as to where there can be a lot of wastage,.
- and the third part is going to be a Venn diagram that is pricing vs capacity vs efficiency. So don’t let those words scare you, when we get to the third part of the series I’ll break it right down and you’ll be able to understand why it is important and why you need to look at it.
So right now we are looking at a couple of items, and those items are on your balance sheet. They are your debtors, your creditors and your inventory. If inventory doesn’t apply to your business, say you are a service based business, just ignore that part.
Debtors are invoices that you have sent out to clients or customers that haven’t been paid yet. Many businesses will do the work then they’ll invoice. So you’ve done the job but you don’t have the money in the pocket yet. So what I want you to focus on, what I want you to look at is how quickly you invoice. I know tradies for example as not very quick at doing their invoicing. I want you to leave a job and invoice on the spot, worst case at the end of the day, but a lot of them leave it until the end of the week.
If you do a job on Monday and don’t invoice till Friday and say the terms on your invoice are 30 days, well your terms are actually 35 days because you’ve taken that whole week to invoice the client. There is an extra 5 days they are getting. The way I want you to look at it is like you are giving them an interest free loan!
Once you get on top of your invoicing which I want you to do ASAP, I want you to then look at your debtors. You can run a report called an Aged Receivables, if you don’t know how to do that, ask your accountant or bookkeeper to help. This report will show you what makes up that balance. So let’s say you have $100,000 outstanding in trade debtors. That means there is $100,000 owed to you in cash that you don’t have yet but should be in your pocket.
Some of these debtors might still be within their terms e.g. if you have terms of 30 days and it has only been 10 days, well they don’t owe you yet. But it is the ones that are post 30 days that you really need to get cracking on. So you are going to have to setup some sort of accountability that I can help you with, and it is looking at debtors that have now fallen out of their terms and lets chase them up. Remind yourself that this is your business, you make the decisions, you run it, you pull the strings. Your clients are working to your calendar don’t you start working to their calendar or their cashflow while your cashflow suffers.
A lot of the time the clients would have forgotten to pay their invoice:
“oh, I though we’d already paid it? I’ll pay it for you today.”
Or they say they didn’t receive the invoice. That’s always a good one right? So you can say:
“ok, well I’ll send you another copy now, can you pay it in the next 24 hrs?”
Get on top of it!
The other side of it is your creditors so they might be things like bills to Telstra or it might be rent for example. What I find small businesses do in this case is they start to pay these invoices too quickly. So you might pay them when they come in or you pay them based on past experiences or assumptions. So if Telstra gives you 30 days to pay their invoice, well it doesn’t make sense to pay it in 20 days, it doesn’t make sense to pay it in 1 day, you should take the whole 30 days.
What you need to understand is that not a lot of business owners know, on average, how quickly they pay these invoices. But you’ll find that they usually pay their creditors quicker and let their debtors pay slower. So what that means is that people are taking longer to pay you but you re paying your suppliers quicker, so you are just chasing your tail and that can lead to poor cashflow and then usually what happens is you start to struggle to pay rent, you struggle to pay the ATO, you simply struggle for the business to stay alive. I see it all the time.
There’s a function in Xero, everyone should be using Xero, if you are not then you are mad, but there is a function there called Accounts Payable. That is where you store all of your supplier invoices. So how do you do that? Get on ReceiptBank if you are not already on it. ReceiptBank will enter all of those invoices in there for you. The cool thing with that is that it is like your invoices for your debtors. You can go in there and see what are outstanding, when did I send them to the client and when are they due, the same things applies for your suppliers.
So you can go in there and see what are all of my outstanding creditors at the moment, how much are they for and when are they due. So you can start to forecast a little bit on when money will be coming in from clients and when money needs to go out to suppliers and on what dates. It also keeps up good relations with your suppliers which is just good business.
The third part is inventory. If this doesn’t apply to you, you can stop reading now but make sure you check in for the following episodes in this series. Inventory? What does that mean? Well let’s say you are a retailer, you are going to buy stock at wholesale, then sell at retail. What that means is that to buy at wholesale you are paying to buy those goods to put in a warehouse or a factory, to then sell at retail. So there’s this time period between when you buy and when you sell. So that is called your inventory turnover or how many days you are holding onto your stock.
Now if you are holding too much stock, or you have certain product lines that don’t move quickly, meaning there might be some old stock that has been sitting there for 6 or 9 months, that is cash. Because you have had to pay for it now its sitting there. So how do you get that cash? Well you need to free it up by selling those items. If they are old obsolete items you can try strategies like selling at a discount even for a small margin or breakeven or even at a loss to recoup your cashflow. Have a look, crunch the numbers and see whether you are better off getting rid of these items and getting some cashflow in now as opposed to sitting on something that may never eventuate.
Regardless of your turnover, you don’t want it to be too long, but you also don’t want it to be too short. By too long I mean you have purchased items that are sitting there for a long time and you have your cash tied up in stock when you could hold a little bit less stock by not buying as much, it will turn over quicker and leave more cash in your bank to play with and meet your short term debts. Keep in mind that you don’t want your turnover to be too short because you might get caught out e.g. but not properly managing your cashflow you might not be able to pay for the next order of goods that you need quicker due to low stock levels and then you’ve got all these customers waiting.
So there are my tips. Get onto your debtors, make sure they are paying you within 30 days and check out Debtor Daddy if you haven’t already. I’ll do a separate post on it if you guys give me some feedback and you want to know more about it. That’s really cool for helping you keep on top of your debtors. With your creditors, make sure you use the function within Xero and use ReceiptBank. It’s sitting there ready to do all the hard work for you. With your inventory, look at your numbers, what does it look like?
That’s series 1 and it has been a lot of info. I’ve tried to keep it short but we could spend the whole day talking about this. But this is here a lot of money is tied up. In the next two parts, especially the next one, you are going to find out where there is a lot of wastage in the most common areas so stay tuned.
Check out Episode 2 HERE!