Cutting the Gap - How to maximize cash flow

Mind the Gap

Cutting the lag between money out and money in can save you thousands. Are you doing all you can to loosen the cash squeeze?

"You need to spend money to make money" the saying goes, but the real key to business success is cutting the gap in between.

Small businesses can often find themselves caught out by the delay between outlaying on suppliers and receiving payment from customers. The longer this cycle, the more cash a business needs to cover running expenses while money is tied up elsewhere.

But there's a lot that SME owners can do to cut the lag, with new technology making it easier to run a tight ship.

Invoice immediately Bill clients when work is completed, or your product or service is delivered, not at the end of the week, fortnight or month. It's a false economy to think going through invoices in batches is more efficient.

When a business takes a week or more to send an invoice, clients may presume they are in no hurry to get paid. Conversely, online payment company Due reports invoices issued the same day a job is completed are 1.5 times more likely to be paid on time.

Discount prompt payment Offer a discount to clients who choose to pay early, say within 14 days rather than 30. Or if you have shorter terms, make sure clients don't drift past the due day by offering on-time discounts. Follow-up with an automated text or email through systems such as Xero or MYOB when the discount period is about to lapse.

Make it easy Studies indicate procrastination, not lack of funds, is the reason many invoices are paid late. Businesses can avoid getting relegated to the ''I'll do this later'' pile by making their invoices as simple to understand as possible. That means no surprise costs a customer may need to query.

E-invoicing should be standard practice as it's cheaper and faster. Include as many payment options as possible, all with click-through links. Anything that requires a debtor to work harder - cutting and pasting account numbers, for example - risks them abandoning a task until later.

Cut stock Running a tight inventory ship can be a delicate balance. Slow-moving stock can be a killer but you need to have enough to hand to be responsive and reliable.

This is where software can make a dramatic difference to track and identify slow-moving products and changing sales cycles. There is a dizzying array of inventory management software. If you're unsure where to start, ask your accountant or talk to other SME owners at business networking events.

Dig into data Big data is becoming more and more accessible to small business owners. They've always had the information, the problem was they didn't have the time, skills or software, to analyse it. New tools are making it easier for SMEs to drill down into existing information.

The cost of paying an accountant or digital marketing expert to help set up systems to analyse trading data can more than pay for itself. For example, sales records can identify high-margin, high volume products or services - your profit drivers. Once a business has this, delving further into customer metrics can identify what types of person or business is the main buyer, allowing a business to pivot your marketing to focus on this client demographic. Facebook and Google Analytics are good starting points.

Consider shorter payment terms The past few years has seen a huge push by the Australian Small Business and Family Enterprise Ombudsman, along with the Federal Government and Business Council of Australia to highlight the hardship that long payment terms place on small businesses.

SMEs should consider leveraging goodwill to shorten payment terms. It is also worth checking whether clients have existing small business policies. A recent review found SMEs were unaware many large companies had special payment policies in place to fast-track payments to SME suppliers1.

Chase debt early Set a process for chasing overdue accounts promptly. Systems such as Xero can be set up to send reminder emails, for example at three days overdue or seven days overdue. After two weeks, experts recommend phoning to get a commitment to pay. Business Victoria has a range of escalating debt recovery templates from ''friendly reminder'' to ''final demand''.

Stretch your terms On the flipside, monitor your outgoings and make sure you aren't paying your invoices too promptly, sending money out the door before you need. Automated payment systems can schedule payments to maximise cash flow.

Focus on finance Review the finance you are using. If you run a line of credit, review it regularly to make sure the limits and terms are competitive and suitable for your business. Consider invoice finance if you need liquidity fast. Like to apply for a business loan - Contact Awesome Lending Solutions

1 Review of payment terms, times and practices, Australian Small Business and Family Enterprise Ombudsman, pp 8, March 2019.

Please note we do not provide tax, legal or accounting advice. This article has been written for general informational purposes only and is not intended to provide, and should not be relied on, for tax, legal or accounting advice. We encourage you to consult your own tax, legal and accounting advisers before engaging in any transaction.