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Cash flow is a whole of business system, not just an invoice and collect system

Cash flow

In recent times the amount of articles and blogs in business circles written surrounding the topic of small business debtors and the ability to get paid on time, if printed, would probably be enough to cover the entire country in paper.

I certainly know that I have covered this topic in the past and yet the issue of not being paid on time is still one of the biggest hurdles for small businesses to overcome. The cost of not getting paid on time and the resulting impact on a small businesses cash flow can be catastrophic.

The costs of poor debtor management and cash flow can be measured in the following ways:

  • Straight up bank interest on overdrafts, credit cards and lines of credit that need to be used in place of real paid cash.
  • The cost of supplier penalties for late payment due to a lack of cash. Especially the ATO which currently charges 9.36% on unpaid debts.
  • The missed opportunity of not being able to take advantage of supplier discounts for early payments.
  • The pure cost of having a staff member or accountant chasing debtors, spending time on the phone and so forth.
  • The missed opportunity to earn bank interest or other investment income on surplus cash flow.

For even the smallest of businesses the costs we’ve mentioned have the ability to represent a significant and tangible amount of money. This, of course, has the potential to create an out of control spiral as the above factors then affect the next periods cash flow and so on until businesses are unable to pay their debts and eventually close. It does not need to be this way. I don’t intend on repeating the many articles on practical cash management tips, I wrote a similar article on the topic just over twelve months ago. The focus here is to emphasise the absolute must of a business to make sure every client or customer is fully aware of exactly what they are getting for their money. In doing so, you prevent angst and frustration on the other side of the fence. This frustration with receiving unexpected bills and deadlines for payments can and does lead to longer payment times.

Remember, you may be invoicing business to business, but there are real people at the other end of the process and their emotions can and will affect how quickly you get paid.

The key is to follow these five pointers to maximise the ability of your customers to be willing to pay you on time:

  1. Should a client engage you to provide a quote do so promptly and always specify an expiry date on the quote so you aren’t left short by supplier/material price rises. The initial quote should demonstrate a timeline of expected progress payments or at least an anticipated deadline for the work involved with a short payment term at the end of the project.
  2. Where large quantities of materials are needed to satisfy a client’s work, ALWAYS get an upfront deposit. If you need to purchase $10,000.00 worth of materials (on a 30 day account) and a job takes two months to finish and then 30 days (if you’re lucky!) after that to get paid your business is effectively cash negative to the amount of $10,000.00 for a full two months. Refer to my original points above on what this is going to cost you!
  3. Documented payment terms must be attached to the engagement document, whether that be a quote, an upfront invoice or any other form of agreement to provide services. If you don’t have documented legal payment terms, speak to your solicitor. It’s a short term cost that can save you thousands in the long run.
  4. Be aware of what accountants refer to as “scope creep”. This is where you quote for an agreed service at a fixed price. Subsequent to this the client expects more and more of you and of course you comply with their requests to keep them happy and to keep the job progressing towards its completion. Any and all additional work needs to be invoiced as per the terms of your agreement, see why you need one?
  5. The previous point reinforces the need for a detailed quote or engagement letter so both parties know what is and isn’t covered. By protecting yourself you also inform the client. An informed client cannot then get upset with an additional invoice for extra work, especially when they initiated the work. Always do as best you can to issue a new quote for any extra works that can be treated as a signed legal document in the vent of a dispute.

Cash flow is the lifeblood of all small business, without a steady stream of cash flowing into your bank account, you are hampering your businesses ability to not just grow, but survive.

The costs and missed opportunities of absent cash are real and measurable. Take a look at our list of potential costs, if you have a large amount of interest expenses in your profit and loss, are always scratching around or calling clients at the last possible minute begging for them to pay you then it is our sincere hope that these pointers has prompted you to take a look at your business procedures from top to bottom.

The way you quote, communicate, work with and follow up with your clients all has a direct impact on your bank account balance. Remember it is your money, just go about the processes in the right way and your money will be yours sooner.


About the Author:

John Corias is a Senior Partner at m.a.s accountants. He has specialised in small business accounting since 1987, including new business structuring and taxation advice, as well as new business development. Based in Sydney and Melbourne, mas accountants has been around helping small businesses for over 50 years.