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Cashflow: Why profitable businesses go bust

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If business is selling products or services and buying labour and parts at the right price, why do so many go bust?
Cash is often the reason businesses fail. Obviously it’s important to sell at the right price and create maximum profit. A keen focus on collecting payment is vital, as cash is the lifeblood of business.

Cash can hide in many places, such as:

  • Customers who haven’t paid you
  • Suppliers paid too quickly
  • Stock – surplus or slow-moving
  • Work in progress – work not invoiced
  • Plant and equipment that could be leased
  • Excessive overheads

Here are some ideas on getting the cash in your bank quicker:

CUSTOMERS

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 better than having your cash funding other businesses. Employing a part-time receivables clerk could cost as little as $200 per day, but it could put much more than that in working capital into your bank account.

It’s a good idea to measure outstanding customer debts in average days outstanding, as well as dollar terms. You may specify 30 days as your credit terms, but if you’re not collecting, the average could be as much as 120 days. If you’re not collecting from customers quickly enough, the funds to run your business need to come from somewhere else (e.g. bank loans or from the business owners’ pocket). If the business is growing and making more sales, the problem will only grow worse if you don’t address the issue of collection.

SUPPLIERS

Don’t pay them too quickly. Many bookkeepers will get a cheque signed immediately for a demanding supplier or worse still, 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. Investigating other suppliers and better payment terms is also worthwhile.

STOCK

It may seem strange to consider stock as cash. Think of it as fifty dollar notes piled up in your stock room. Many businesses buy when the sales representative calls in or if they get offered a discount. You should buy stock when it suits you and your needs. Discounts can be a big trap. Ask yourself why are they discounting? Do they know something you don’t? You need to measure the cost of that stock sitting around sucking up your working capital against the discount. It’s often tempting to swap cashflow for increased profits, but if it’s going to cause cashflow problems, perhaps it’s not worth it.

WORK IN PROGRESS

If you have many jobs on the go at once, it can be hard to manage them to invoicing stage. Hold-ups occur, such as slow parts delivery, labour problems, access to sites, etc. If you are doing this manually, it can cause cashflow problems. A job management system can save headaches. With a computerised system you have all the information about every job in one place. You will know what work you have done and who worked on jobs for how long. Parts used will be evident, as well as quote versus actual results. This allows you to tighten up quoting. One issue contractors face is not knowing how much labour they are invoicing, versus what they paid for. With a job management system, you can see this. It allows you to ask staff, “What happened with the rest of the time?”
If you do an estimate of how much cash is in outstanding customer debts, suppliers paid early, excess stock and work not invoiced, it may be worth spending some time and money sorting them out. It could put thousands of dollars back into your bank account, it could reduce your headaches worrying about cashflow and it could also reduce your interest bill.

Sue Hirst is a director of CAD Partners, a nation-wide mobile CFO “On-Call”/financial control/business accounting service for SME owners.. For a free copy of the booklet ‘How to control your Business Cashflow… and keep some for yourself’ Ph: 1300 36 24 36 or visit www.cadpartners.biz

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