Question:
I own and manage a small business and we always seem to have cashflow problems, and lately they are getting worse. How can I get on top of this ongoing cashflow issue once and for all?

Answer:
Cashflow in any business can be a frustrating issue. Regardless of how ‘cashed up’ you might think you are, come the 20th of the month there’s usually large amounts of funds flowing out to pay bills.

As long as these are offset by payments you receive as income, the business can carry on. However, any imbalance can lead to major issues in a short period of time.

So with that in mind, it might be time to have a think about how your cashflow is tracking and whether you need to make any changes before it’s too late.

During the December/January period, there’s a lot of tax to pay at a time when income is typically lower – unless you have a retail operation.

For example, businesses with March balance dates will have a second provisional tax payment due and potentially a GST payment to make on January 15.

This is followed closely by a PAYE payment on January 20. Collectively, this can present a cash headache for many businesses.

For tax payments in general, the key is to learn how to manage what is due before it spirals out of control. For every payment you receive on an invoice, immediately put 15 per cent of it into a separate bank account to handle the GST liability.

A further challenge is resisting the temptation to dip into these set aside tax funds.

At the end of each month, put 28 per cent of the previous month’s takings (excluding GST) into a separate account to make sure you’re covered for company tax purposes.

Some of our clients will even make regular payments to the Inland Revenue Department to ensure income tax is covered in advance of due dates. If a loss is recorded for the month, the business owner can decide whether or not to withdraw cash from the separate ‘tax’ bank account to fund working capital requirements.

While it can be easy to suggest putting cash aside, that’s not achievable if you have late payers. Simply put, if you perform a service, incur costs and fail to collect the revenue, you’re likely to end up in a deep financial hole.

A lot of business owners don’t have the time or feel awkward chasing people for payment. It’s important to ensure you have people in the business who can fill the gaps and ensure payments are made.

We’ve had clients who have achieved great success with debtor factoring.

This involves giving up a percentage of the debt owed to you, as a fee, to a third party that pays you the remaining debt while they chase the balance.

This is a fantastic option for small businesses that don’t have the resources to follow up outstanding payments.

Another option to consider is debtor financing. A number of banks provide a service where they will fund you, based on your debtor schedule, charging interest and collecting payment when available.

Also important is the relationship you have with suppliers. Rather than ignoring late payment reminders and hoping they’ll simply go away, front footing any payment issues can often buy you precious time and save an important relationship.

Discuss your cash positions with suppliers – you may be surprised by their response.

Cash flow is the life blood of a business and while this might be a well-worn cliche it remains relevant for a reason. Without a good cashflow, your business cannot function.

If you can see issues on the horizon, don’t put your head in the sand. Map out your cashflow expectations for the next few months with your adviser and start planning for what’s ahead.

This article provides general information only, current at the time of dissemination. Any advice in it has been prepared without taking into account your personal circumstances. You should seek professional advice before acting on any material.