You’re not alone if you feel like your business is sailing close to the wind financially. This is the time of year – with short months and summer holidays – when cash flow can be a real issue.
There’s a growing body of research that has found Australian SME business owners struggle with negative wellbeing and mental health challenges due to business financial pressures and concerns about cash-flow management.
If you’re losing sleep about your company’s ongoing profitability and survival, it may be a good time to refresh your business strategy and look at financials holistically.
The business landscape has changed a lot in the past few years, but your overall strategy may not have. Does it still align with today’s operating conditions? As well as looking at your overall business vision, what are your business’s strengths and weaknesses, and are there any potential opportunities or threats?
It may help to outsource projects and roles and think about areas where you can predict cash flow fluctuations. Virtual CFO services can take the stress out of business financial management and offer specialist expertise.
Here are some other key areas to focus on:
Your company’s working capital is very important, with many businesses structured on debt and high fixed costs.
You may have borrowed money for the business, buying plant and equipment which you make monthly repayments or a lease payment on, and when the cash isn’t flowing from customers, it can become a problem.
During COVID lockdowns, the companies that had working capital and weren’t structured on debt were the ones who came through well.
Those with hire purchases and debt to pay suffered more and took longer to rebound.
Advice from finance professionals is to sit down every quarter to review your business environment. This involves looking at what’s happening in the market, gauging correct pricing, KPIs, and what your wages-to-revenue ratio should be.
Ask yourself questions like: “If we’ve made wage increases, have we increased sales prices? What are our competitors doing?”
If you’ve had price hikes from suppliers that are affecting profits, don’t wait to deal with it.
Also, review what’s making good money in the business and what’s not. Don’t be afraid to pull any products or services that aren’t profitable.
It’s all about valuing your time and effort in cash terms.
Future forecasting is important as well, so you can clearly understand how long it will take to convert a service or product into profit.
There will inevitably be some customers who are slower to pay their bills than others.
One way of tackling irregular payments is to offer clients multiple payment options, such as a “pay now” button on their invoice with a credit card, or the ability to pay off a bill, breaking it down into portions.
Be clear with customers about the terms of trade, such as the need for upfront payments due to staff and material expenses.
When you've got staff to pay, you want to minimise the days you're covering their wages before being paid by your customers.
Many small businesses give their customers too much leniency in paying bills - the 20th of the following month can create a real squeeze. Ideally, it should be within 7 or 14 days, especially if you’re delivering a product.
If you’re a tradesperson, you should be asking for 50% upfront and the other 50% on delivery, so you're not out of pocket in paying for the product.
SME owners may be very good at their work, but they might not be as good at putting money aside for taxes.
If you don’t have the money put aside to pay the GST at the end of a GST cycle, it can knock you over very quickly. It’s better to pay taxes more regularly than let the amounts become insurmountable.
To have a financial buffer is what you want - ideally - but it’s not always the reality for small businesses, with many SME owners living month-to-month.
There is no doubt that the summer months of December, January, and February are especially challenging for small businesses in terms of cash flow.
Several triggers can take a previously financially sound company into one with some serious cash-flow problems.
It might be when a company owner thinks someone else is running the business for them and they don’t have adequate controls in place. Or you might get injured on the job and can’t work for some time, so cash flow becomes constrained.
If you’re getting to the end of February and you haven't done much work in the past 2 months, you’ll probably have to tighten your spending inside and outside the business.
Financial illiteracy is generally high in Australian SME owners, but if you need help, get some training.
It may be tempting to rely solely on your online accountancy service to keep you on the straight and narrow, but accounting platforms like Xero are a tool, they’re not the whole solution. And the account information on your platform is only as good as the data you’re putting in.
Also, make sure your company accounts are complete and correctly coded, so you always have an accurate, up-to-date picture of your finances.
SMEs are historically undercapitalised, hoping that any growth is going to be funded out of cash flow. Or the business may grow and take on investors, with future success dependent on them scaling up.
If you think you’re heading towards insolvency, seek the advice of a good accountant and possibly a commercial lawyer. Their fees are worth paying.
*We hope this article has provided some helpful information. It is not intended as a complete guide, nor does it consider your individual needs or situation. You should always seek independent advice.