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May 26

The first cause of poor cashflow - Your cash lockup

Posted by James Burn on Sunday, May 26, 2019

There’s a massive difference between profit and cashflow. Profit increases when you create an invoice for work you’ve done or goods you’ve sold; cashflow only increases when you actually bank the money.

Your lockup equals the cash that isn’t in your bank account because it’s either in work in progress  (you’ve done some work but you haven’t yet billed for it) or you have invoiced your customer but are still waiting to be paid.

There are two key processes that need improvement to reduce cash that is stuck in lockup. Within each of these two processes, there are many  strategies that can be implemented to put more cash in your account.

The earlier you invoice a customer, the faster you’ll get paid. How quickly after delivery of a product or service do you bill? Do you carry large work in progress because your service spans weeks or even months? If so, maybe consider progress billing on a regular basis? Interim billing may in fact be best practice in your industry.

You’ve done the work, you’ve invoiced your customer, now it’s time to get paid.

Do your customers have clear Terms of Trade with you and do you set clear expectations as to when you expect to be paid? Is that 14 days after invoice? 7 days? Shorten up that timeframe and your cash lockup will go down significantly.

How easy do you make it for customers to pay you? Your invoices and statements should clearly show all the information that will speed up payments, such as bank account details, due date, and status (current or overdue. Don't show 90, 60, 30 days!).

Do you provide multiple payment methods to customers? For example, direct debit and credit, credit card, Eftpos, debtor finance (where appropriate). Having options is known as the choice of ‘yeses’. Do you offer a small discount for prompt payment? Customers love discounts.

These are just some of the changes you can consider to reduce cash lockup. There are dozens more. Talk to us about creating a Cashflow Management Plan. We’ll show you what’s possible, in cold hard cash of course!

May 20

Cashflow Freedom - The 7 causes of Poor Cashflow

Posted by James Burn on Monday, May 20, 2019

Cash is King in any business. In fact, even profitable businesses can fail because of poor cashflow.

What’s important is that you understand your key cashflow drivers. Improving cashflow is often all about changing your business processes. Processes such as how and when you order stock and pay for it, when you bill for your products and services, and how you make sure you get paid by your customers.

Treating the symptoms of poor cashflow without fixing the underlying causes is time consuming and frustrating.

Poor cashflow is a symptom, NOT the cause. In order to fix these underlying causes, you need to be willing to make changes in your processes. By making these changes, you'll build a much better and valuable business, as well as improve your cashflow.

While there are many causes of poor cashflow, most of these relate to one or more of the following seven categories.

1. Your cash lockup.
By lockup, we mean the cash that isn’t in your bank account because it's tied up in work in progress (work you have done but not yet billed for) or you’ve billed your customer but are waiting for payment.

2. Your accounts payable process.
If you don’t have spending budgets in place and aren’t taking advantage of the best possible supplier terms, your cashflow will be impacted.

3. Your stock turn.
If stock is moving too slowly, it will take longer to turn the stock you have already paid for into cash.

4. The wrong debt or capital structure.
For example, if your loans are being repaid over too short a term, this will place a big strain on cash reserves.

5. Gross profit margins are too low.
Your gross profit margin is what’s left from sales value after variable costs are deducted. If it’s too low, it won’t be enough to cover fixed expenses and your drawings from the business.

6. Overheads are too high.
Every business should do a thorough review of its overheads each year.

7. Sales levels are too low.
If sales levels don’t support cash demands on the business, then sadly, the business is not currently viable.

"If I had to run a company on three measures, those measures would be customer satisfaction, employee satisfaction, and cash flow." - Jack Welch