If business is booming, why are some companies still struggling?
Being busy does not always equate to healthy profits and good cash flow. Late payments, incorrect margins and poor planning all affect cash flow negatively and good cash flow is essential for any business to succeed in the long term.
The four basic rules for managing cash flow
- Put cash aside for taxes – that’s GST, terminal and provisional tax. Your accountant can advise what percentage of your earnings this should be, but 20-25 percent is a good starting point … and don’t forget your ACC payments.
- Clear all bad debt.
- Reinvest in your company. Think about how you could improve your company’s performance and bottom line – this is where you should spend money.
- Take your dividend. Yes, this means paying yourself that well earned bonus – after you have dealt with 1 to 3 above.
How to improve your cash flow
Choose good clients
The good news when business is booming is that you can afford to be more selective with your customers. A few smaller clients who pay on time are better for cash flow that one large client who doesn’t. You’re not a bank, so don’t sit back if someone owes you money.
A good client:
- is a pleasure to deal with
- always pays according to your terms and conditions
- returns to purchase your goods or engage your services time and time again
- refers you to other people.
Make your T&Cs clear
Another way to ensure you are paid on time is to have clear terms and conditions. This way, everyone understands when payment needs to be made and what penalties will be incurred if the terms and conditions are not met. Get help from your lawyer or accountant if this isn’t your area of expertise.
Get your margins right
Incorrect margins also have a major affect on cash flow. I had a new client once who was busier than they had ever been, but were just not making money. Net profits sat at around four percent simply because they are undercharging. Back costing is a useful exercise in this instance. Look back at your last five jobs and determine the gross margin. Understand your real costs and use this information to get your pricing right.
Keep an eye on cash in the bank
In the last week of the month, look closely at what jobs you could do that could be invoiced out at the end of the month. For example, if you have a four-month project you could start, and six smaller jobs – do the six, invoice for them, then start the larger project. If you are not being paid until the 20th of the following month – all those smaller jobs are cash in the bank.
Don’t be afraid of a price hike
Last but not least – look at putting your price up. The tolerance among your customers for price hikes is often much greater than you think. You have a specialist skill set or product and your client needs it. Believe in the value of what you offer and increase your price appropriately.