|Managing your assets: Cashflow
How to avoid running out of cash
The difficulty that small businesses have in borrowing money doesn't just make it harder to start up. It also makes it harder to stay in business through the ups and downs. While a larger company might have assets that it can borrow against to see it through hard times, smaller firms generally don't have much of a cushion against sudden falls in income.
That means that you have to keep a very close eye on your bank account - not just how much is in it now, but how much you need to pay out today, tomorrow, next week and next month. This is called cashflow management. You don't need to make it complicated, but you do need to attend to it every day.
The first step is to forecast your cashflow. Identify when you need to spend what (and how much) and when you expect to get paid. Put this information in a spreadsheet or a table, with columns for 'Forecast Income' and 'Forecast Expenditure', as well as columns for 'Actual Income' and 'Actual Expenditure'. Fill in your actual figures every day to check that they are in line with your forecast. As soon as you start over-spending or 'under-collecting', you'll be able to see it and respond accordingly.
How to get paid on time
You may be one of those many businesses that don't get paid immediately for the products or services you sell. As a result, you are constantly in a 'cash-shortfall' situation, and need substantial working capital to keep yourself going while waiting to get paid. Don't sit back and bemoan this fact, though. There are a number of ways of getting money in quicker, or at least reliably.
Make a clear agreement with your client about how long they will take to pay you.
- Make sure you invoice your clients quickly, and correctly. Don't wait "until you've got time" to prepare the invoice for the job you've just delivered. Make a time every day (preferably when the phones are not ringing) to prepare invoices, or get someone to do it for you.
- Don't entrust everything to the post. If you can drop the invoice personally when seeing the client for another reason, so much the better. If you can't, ask them if they can act upon an invoice sent by email (you can always send an 'original' in the post if they want one).
- Check that your invoice has been received by the right person, and that all amounts and details on it are correct. Just a phone call will do the trick: "Has it arrived safely? Is there anything you want to query?" This will prevent queries being raised after you've been waiting a month.
- Don't be shy to follow up. Call your client a week before payment is due, to check that there are no unforeseen problems and that payment will in fact be made. Offer to fetch the cheque if you have to. In most cases, do everything you can to stop them putting it in the post!
- Go the electronic route. Make it as easy as possible for your client to pay you. Let them have your bank account details (as long as they are trustworthy) so that they can make electronic transfers to your account. This will save them time and money (cheques are more expensive than on-line transfers) and will ensure that the money is available to you as soon as it arrives in your account. On the other hand, banks take days to clear cheques before you can spend the money.
How to spot a bad debt before it hits you
When a big company goes out of business, it usually takes a whole bunch of small suppliers down with it. Don't get caught in this unenviable position. Keep a close eye on your late-paying customers, even if it means asking other suppliers about their experiences.
The formal route is to pay a credit agency to alert you if any of your customers look like they are in financial difficulty. This may be worth the expense if your business is vulnerable - for instance, if you have just a few large customers. If you have a large number of equally important customers, however, the impact of one of them not paying you is less.
If you suspect that someone is not going to be able to pay, don't keep supplying goods and hoping that everything will turn out OK. Rather take action or advice.If you are exporting, there may be a higher risk of not getting paid, so there are special measures you can take to insure against this possibility. Talk to the Export Credit Insurance Corporation of South Africa (Pty) Ltd, a government-owned company under the auspices of the Department of Trade and Industry, for more information
What to do when you can't pay your suppliers on time
There is only one way to do this: be upfront and honest. Tell your suppliers, as early as possible, that you're going to have problems paying them when they expect you to. Suggest another payment date that you think you will be able to meet, and offer to pay part of the bill on time as a gesture of good faith. Most suppliers will be less worried if they see even a small portion of the money coming in regularly.
It might not always seem like it from their reaction, but they will respect you for being straight with them. Waiting for them to get hold of you, and then dodging their calls, will only make them uneasy about believing anything you say.