Keep cash flowing to your small business

Keep cash flowing to your small business

Cash flow cripples more small businesses in this country than any other cause. Negotiating the right payment terms with customers and suppliers is key to avoiding cash flow disasters.

Setting your payment terms up front with your customers—and knowing the payment terms of your own suppliers—means you can tackle cash flow head on from the moment you open the doors.

Give your customers options that work for you and them

When you set your pricing structure and payment terms, consider your customers.  Lily Mason knew when she started her business Lily Mason Yoga that she needed to offer her customers options that worked for her.

“I wanted to maximise numbers,” said Lily, “But at the same time, I wanted the money in the bank in advance.  So I developed a pricing structure that included casual visits, but also offered an incentive to those who could pay monthly, or in blocks.

“The key was making sure that I got the margin I wanted on the monthly or block payments not the casual payments, and that I marketed my classes right so the majority of my customers opt for the payment in advance options.”

Set up your supplier relationships for success

Offering customers flexibility needs to go both ways.  You are worth a lot to your suppliers, and as their customer, you need to know their terms up front as well.  Map that against your revenue.  If you have to pay on delivery for supplies, but offer 7 days upon invoice to your customers, you’ll end up out of pocket.

This sounds obvious, but Australian Bureau of Statistics studies show that over 42% of Australian small businesses who obtain debt or equity finance do so to address their cash flow shortfall—rather than to expand or improve their business.   

Set your terms up front

Taking the time to know the payment terms that work for your customers and suppliers is time consuming, but the savings will show in your cash flow and your stress levels.

Don’t forget that you have negotiation power.  Query supplier payment terms; cash on delivery may be standard, but you may be able to negotiate an alternative that will take the pressure off.

Know the risks

It’s not just pricing structures you need to consider, but risks as well.  Your bank manager, accountant and insurer will be able to help you explore the risks you’ll face in business; that includes your cash flow.  Make it easier on yourself by picking those that specialise in small business, like CGU insurance, so they know what you’ll be dealing with.

When you set payment terms for your customers, you need to consider:

  • Types of payment
  • Credit limits
  • Early payment schemes
  • Legal requirements
  • Customer credit worthiness

“I thought having EFTPOS available was about customer convenience,” said Lily, “But it turned out to be a way of making sure people have fewer reasons to avoid paying up front.”

Don’t be caught out

We all like to think our customers will pay on time, but it’s not the reality.  According to the 2016 MarketInvoice study, Australian companies are the worst in the world when it comes to paying on time.  Depending on your business, some of these companies will be your customers and you need to be prepared.

  • Have your accountant, lawyer or small business adviser look at your debt collection policy
  • Know what you are legally entitled to do, and the options you have if a debt goes bad
  • Consider your financial and insurance options if you think you are overly reliant on one or two large customers who may be late payers.

Cash flow will hurt at some time in your business, but if you deal with it up front and on your terms, at least you know that you will always remain in charge