Why not having three months working capital in the bank is bad...

Why not having three months working capital in the bank is bad for your health

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Cash is king for small business and based on our experience working with hundreds of SME businesses across Australia there are two questions that every SME owner should be able to answer yes to without hesitation, month-in and month-out:

1. Do you know what your total monthly overhead is?

2. Do you have enough cash in the bank to cover three months of that overhead?

The unfortunate reality is that the vast majority of SME owners cannot answer yes truthfully to either of these questions and this is supported by the huge numbers of SME businesses collapsing each year. The Australian Bureau of Statistics states that 50% of all SME operations go out of business within three years and over 40% of these failures are due to poor cash management.

Why does cash management matter?

Catastrophic disasters aside, having a poor grasp on the cash moving in and out of your business means you’re unlikely to have the working capital needed to implement your business plans. It also means that you’re going to be spending a huge amount of time putting out fires in your business – micro-managing expenses, dealing with stressed staff members – rather than getting on with what you should be doing which is growing your business and crushing your goals. You want dividends, not depression, from your business!

How do you achieve good cash management?

There are a handful of simple things you can implement in your business to ensure that cash flow isn’t something you spend hours every day stressing about. You’ll want to be confident that the following systems in your business are rock solid by ensuring that you can answer these questions:

1. Sales & marketing

a. Do you have a sales & marketing machine?

b. Do you have a steady stream of new work coming in?

2. Budgeting

a. Do you have a budget or forecast in place?

b. Do you review it regularly and report on variances?

3. Service agreements

a. Do you have a service agreement template?

b. Do you have a signed agreement in place with all your customers?

c. Does the agreement state how you charge, when you charge and what happens if they don’t pay?

4. Invoicing

a. When do you invoice?

b. How often do you invoice?

c. What methods of payment do you offer?

d. What are your payment terms?

5. Debtor management

a. How do you send invoices?

b. How do you send reminders?

c. When do you take legal action?

Once you’ve implemented solid cash management systems in your business you should start to see some real improvement in your bank balance in no time. As the title suggests, a good goal is to have enough in the bank to cover overheads for three months – this gives you plenty of breathing space in case you experience a downturn for any reason.

Don’t let a disaster be the reason you get the cash situation in your business into shape – get started today!

Ben Fletcher is the managing director and co-owner of Generate, Australia’s leading accounting & advisory firm for creative and innovative thinkers.

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