Six Simple Ways to Improve Your Trade Business’s Cash Flow
Do your numbers look good yet you never seem to have enough cash to cover your wage, supplier invoices or BAS?
There is nothing that will kill a business quicker than poor cash flow. Knowing that this is true, what can you do to improve it?
The truth is, many of us assess our profit using a P&L (profit and loss) report, yet this is not the same as understanding our businesses cash flow.
In its simplest terms, the P&L reflects that the invoice has gone to the client but the payment, the cash, may not have been received.
Cash flow, in the meantime, can be used as a measure of your business’ liquidity. This can be extremely useful when an owner wants to sell their business as investors look for liquidity.
Cash flow can be measured historically and as a projection.
As a historic measure, it tells the story about how money moves in and out of your business over a period of time.
As a tool to project future needs, cash flow can help you plan to ensure there is sufficient cash coming IN to cover the future projected flows of cash OUT.
Business owners need to track and predict cash flow in order to:
- always have enough in the bank to cover cash payments.
- always have enough to cover BAS and tax payments.
- avoid bank charges for overdraw or “insufficient funds”.
So, knowing this, what can you do now to improve cash flow in your business?
Here are six easy ways to improve cash flow in your business…
1. Payment from your customers upon completion of the job.
As soon as you complete a quote for a customer, have them sign the quote as acceptance and inform them that payment on completion is expected. You will need to ensure you explain this expectation to your customer when booking the job so it is not a surprise – communication is always the key. By having them pay straight away – you are ensuring you get the money you deserve right then and there, improving your cash flow. AND saving you the hassle of chasing them for payment later down the track!
2. Clear payment details on invoicing.
Ensure that your payment details are stated clearly on your invoice so that it is easy for your customer to make payment. Make sure that all cards you accept are listed (with appropriate surcharges if applicable) and your bank account details are clear and correct.
3. Do not pay suppliers early.
Pay to their requested payment terms. If you have 60 days to pay your bill, don’t pay on the 1st day; pay when you’re ready. In saying that, don’t leave it to the last minute on the 60th day, treat people as you wanted to be treated (or pay people as you want to be paid), what comes around goes around.
4. Take advantage of cash discounts from suppliers
How often do you receive a bill from an electricity provider that says “you owe $800 if paid before the 27th of this month and $850 is paid after this date,”?
This is a perfect example of a cash discount, which is a discount on a bill that sellers may offer to consumers if they pay the bill before the due date. If a supplier offers this, make sure you take that discount and pay before the due date to save yourself some cash!
5. Send regular statements to customers.
For customers who haven’t paid up front (most likely strata and real estate customers) make sure you are sending regular statements that itemise the debt. These act as a constant reminder that not only do they owe you money, but also of your payment terms.
6. Call the accounts payable department of your customer and ensure that they have your invoice in their system for payment.
Sometimes invoices sit on people’s desks, or are lost in the transition from approving person to accounts. Make sure you or your admin staff call the accounts payable of the strata company with outstanding payments to make sure they have received your invoice and understand they need to pay it soon.
If after points 5 & 6 you are still chasing payment from strata, check out our previous article on how to chase payment from customers.
These are just some of the ways you can improve cash flow in your business. This is all about pulling in money owed to you as fast as possible, and paying out money you owe as late as possible. But remember, your cash flow is not your profits!
You could have a highly profitable business but still have negative cash flow. Make sure you’re preparing a monthly cash flow statement (over and above your P&L statement) to ensure you have enough cash at all times!
If you’re interested in learning more about your trade business profit & loss, cash flow, and more, check out Episode 6 of The Tradie Show, ‘The Tradies Guide to Understanding Your Numbers’. CLICK HERE to watch it for free.