As a small business owner you have many roles to play – none more important than managing cash flow, explains Brett Kelly.
“The main error small business owners make is to focus too much on price and profit without really understanding cash flow,” says Brett Kelly, Senior Client Director at Kelly+Partners.
“Price is important to cash flow, but if you don’t understand the importance of both your terms of business and recovering the full cost of providing your product or service, at some point, this will become obvious in your cash flow – and not in a pretty way.”
According to Mr Kelly, there are five key points to address when it comes to cash flow:
1. Get clear on your terms of business
Many business owners don’t understand the importance of their terms of business and this dramatically affects cash flow. They focus heavily on price without understanding that how quickly you get paid is often more important than what you get paid.
Good terms of business that will stop you being exposed to huge debt are to get 25% up front, 25% during the process and then the full balance on completion and delivery of your product or service. Alternatively, 50% up front and 50% on completion is also highly recommended.
Work out your terms of business with your adviser, and then figure out what your competitors are offering (business owners always know what their competition charges but they don’t often know their terms).
From there, you can figure out how much working capital you need to run your business – working capital being the cash required to fund your operations between the day you sell something and the day you collect your money.
2. Have a cash flow forecast
It’s important to make sure you actually have a cash flow forecast because it allows you to take action ahead of time, rather than finding out during a crisis that you have no cash. Many small businesses lose money by failing to recapture the full cost of their product or service by not effectively accounting for the business owner’s time in delivering it. Through a lack of experience, many smaller costs are often missed and, while small, they can add up to substantial losses.
3. Engage professional expertise
Find an adviser that has expertise in cash flow forecasting in your industry. People often have a go at managing their cash flow but don’t have the knowledge to do it effectively, so it’s helpful to consult someone with more expertise than you currently have.
4. Increase your sales goals
Most business owners’ goals are too small for their operation. If you only aim to cover your costs and you fall short, you will end up broke. Cash flow is driven by sales, and the best way to ensure business survival and growth is to try and sell much more than you thought you could. Typically, the sales activity you should be undertaking is a minimum of 10 prospect calls a day. If you’re only calling five prospects, you should definitely be upping the stakes. In the early stages of set up, you should be making up to 50 calls a day.
5. Moderate your expenses
Most cash flow problems are caused by people going into business in a weak financial position. If you need money out of the business in the short term, you will quickly encounter a cash flow crisis. You need to figure out what your requirements are.
For instance, do you have a huge mortgage and other massive requirements that will take cash out of the business? If so, you will need to pay yourself less and manage your lifestyle to the most moderate level in order to leave as much cash available for the growth of the business.
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This article represents the views of the author only and not those of American Express. The information contained in this article does not take into account your objectives, financial situation or needs. Before acting on this information, you should consider its appropriateness to your circumstances.
Brett Kelly is the founder and CEO of Kelly+Partners. Since 2006 he and his team have built the firm from scratch to be the 41st largest Accounting Firm in Australia (of more than 13,000 firms).