Over more than 30 years in the accounting industry, I have found that business owners often make the same mistakes regarding cash flow and profit. Don’t get confused between cash flow and profit, they are not the same. I have outlined some common cash flow mistakes in this article.
Not surprisingly, businesses end up hitting the wall and failing due to poor planning and implementation of their cash flow. Remember your bank balance is not the only indicator of how good or bad your cash flow is! Getting your cash flow under control helps eliminate those unexpected surprises as well as ensure you pay yourself, meet month end commitments like payroll and supplier payments, and plan for VAT and tax.
Putting the right processes, procedures and systems in place can go a long way to improving cash flow. Imagine reducing debtors’ days from 70 days to 40 days. How much more would that put into your bank account at the end of each month?
Tips to improve cash flow
Put a process into place to understand and manage your client’s payment cycle and procedure. Who has authority to issue a PO, sign off your invoices and issue change orders?
Have a process to follow up late payments systematically. There are ways to do this effectively while maintaining a good long-term business relationship.
Don’t start a project until you have a purchase order.
Agree to a monthly retainer if it is not a once off project. For bespoke projects, agree an up-front payment (40% to 60%) before commencement, as well as terms for part payments and the final bill.
Establish the procedure up front for change requests. Do they require a separate purchase order? What will the payment terms be?
Know who your profitable customers are. Identify those customers who consume all your resource or ask for discounts (they don’t value your product/solution). They may look good in your income report, but you could be making little or no profit from them. Spending more time with less profitable customers is actually a disservice to your good customers who you need to nurture.
What should you do next? If you don’t take action, then you will find that your cash flow dilemma will be a problem a year from now. Break down what you need to do with goals and a time scale to keep you on track. Or, you can fast track the process by contacting Add-Worth Accountancy for a discovery call, you can book you spot here or email firstname.lastname@example.org.