The start of a new year is an exciting time for all, but it’s also the time when small businesses are most likely to struggle with cash flow. It’s important business owners start planning early to make sure they have enough cash.
Many small businesses suffer a cash flow crisis in the weeks after Christmas leading into the New Year, even profitable businesses. Work slows and they don’t have money coming in, yet they still need to meet regular expenses such as rent, loan repayments and wages.
But it doesn’t have to be this way. The key is taking action as soon as you can rather than waiting until the last minute when you might already be in trouble.
Here are seven tips on how to stay in the black during the first few months of this year.
If you don’t already do cash flow forecasting, now is the time to start. Do a forecast up until the end of March so you have a clear picture of whether you’ll have enough cash to get you through the break and happily to the end of the first quarter. If you use accounting software, you’ll be able to do this using data from previous years, showing your expenses for the period and how much money came into the business. If you’re unsure about this, you should ask your accountant for help. Having your financial records up to date and accurate is incredibly important. It allows you to have the required information that you and your advisor can work on together to plan for this period.
Get your invoices out
A lot of businesses shut down over the Christmas break and even those that stay open usually close their accounts department. If you didn’t get around to sending out your invoices before the break, your first task this year is to remedy this. So get your invoices in as soon as possible and if you have a particularly large client whose payment you’ll definitely need to keep things going, ring and check their new year invoicing system.
To incentivise your debtors to pay quickly, consider offering small discounts, such as five per cent, in return for immediate payment. It might be worth more to you to have 95 per cent of the cash immediately rather than wait to get the whole amount at the end of the quarter.
Chase late payers
You should be chasing up late payers as a matter of course, but it’s particularly important as you start off the new year. Use your accounting software to discover which customers’ bills are overdue and follow up with an email or a phone call. There are some great software add-on’s available in the marketplace to do this, so check with your specific accounting software or accountant as to what is available. Chasing up late payers is not only beneficial for your cash flow, but gives you an opportunity to speak with existing clients about possible new services that you’ll be offering in the new year.
If you’ve got stock that’s not selling, why not cut your losses and sell it off in a quick sale by the end of January. It is much better to convert it into cash than have it sitting around taking up space at your business premises. There are numerous ways to shift stock at this time, social media offers can work really well and can move stock quite quickly. The most important thing to remember is to be creative!
Talk to the bank and your suppliers
Don’t take your bank or your suppliers by surprise if it looks like you’re going to have some cash flow difficulties in January or February. Arrange a line of credit with your bank sooner rather than later, because there is the possibility that it might be more difficult to achieve later in the year. Likewise, see if you can get an extension from your suppliers or work other payment arrangements, such as half in February and the other half in March. Managing your creditors closely is important and staying on top of them will give you a good overview of what your real expenditure is. When you look at an annual spend on something that looks quite small on a weekly basis, the annual figure can be a surprise.
Turn invoices into cash
If you have unpaid invoices, you can convert them into cash using debtor finance. This is where a finance company will advance you up to 85 per cent of the cash value of your outstanding invoices. The finance company then chases up the debt and gives you the remaining 15 per cent minus their fee once the customers have paid the invoice. These services aren’t free, of course, so you should weigh up the need for cash against the cost, but debtor finance can provide quick cash for a business caught in a cash flow squeeze.
The start of a new year should be an exciting time for all small business owners, and cash flow problems should be at the back of your mind. These seven tips should help you manage your cash flow more easily, giving you more time and headspace to plan for your big year ahead.
Chris Ridd joined Xero as Managing Director in early 2011 to lead the expansion of Xero’s market share in the Australian marketplace. Since then, Chris has grown Xero to become Australia’s largest online cloud accounting software, growing in four years from seven staff and 5000 customers, to more than 180 staff and 158,000 paying customers.
Xero has won numerous industry awards recognising its excellence and innovation, including CeBIT’s Top Business Solution award as well as the ICT Excellence Award, the highest accolade in the Australian tech industry. Xero was also named Australia’s Most Innovative Company by BRW, and ranked #16 on the publication’s Best Places to Work Awards in 2014. In November 2011, Xero listed on the ASX, with a dual listing across the NZX and ASX.
Before joining Xero, Chris was director of the Microsoft Dynamics Business Group for Australia and was employed by Microsoft for over 15 years.