Over 40% of business owners nominate cash flow as the #1 issue that keeps them awake at night.
Are you one of them? Would you like to know why?
In the latest figures released by the Australian Bureau of Statistics, it estimates approximately 12% of businesses cease operation every year. By the time you get to the five-year anniversary, almost half of all businesses have failed to survive.
Money does make the world go round, so I decided to share five tips on how you can ensure your world keeps turning.
One of the biggest reasons business owners get into trouble is they don’t know what money is theirs. Tip number one is you have to know at a moment’s notice how much of the money in your bank account is actually yours. A simple way to bring some order to this confusion is by creating set-aside accounts for tax and reserves. Whenever you get paid on an invoice, immediately set aside the GST component as a minimum. And on top of that, put aside another amount to cover your end of year tax. If business tax was 30% and you know you roughly make 50% profit on your revenue, then 15% is a good round number to set aside for your end of year tax.
Tip number two is, get your pricing right. Many businesses don’t have any idea on how to price for profit. They instead just follow others in the market, not realising that they cannot match those prices and survive. The trick with a smaller business operating in a competitive market is you often have to price yourself higher than the competition and then find a way to justify this by offering better value for your customers. Faster delivery, custom orders, better quality organic ingredients. Of course, to do this, you need to know what your customer’s value and what they don’t.
For my third tip, I want to talk about time management and scheduling. Many business owners are so stuck in the day to day of a business that they complain about not having time to do the finances. So, stop being a victim, and make time to do your financial reporting. Otherwise, you’ll have a lot of time on your hands when your business goes bust.
The fourth reason business owners get into trouble with cash flow is a double problem. They invoice late and collect late. You need to establish a good system for getting your invoices out on time and a system for collecting money according to your payment policies with your clients/customers. No one likes surprises, so always have an agreement in place with a customer that suits you before you agree to supply and then complain you haven’t been paid.
Finally, let’s talk exposure. Many Small Businesses have a problem where they are too exposed to one large customer; often a corporate who has long payment terms of 60, 90 or 120 days. Many businesses have failed when they are too exposed to one large customer. So, my tip is spread your risk, by having a portfolio of customers with no one customer taking up more than 20% of your turnover. And find a way to handle long payment terms with your own system if you can’t negotiate faster payment.
There is a saying that revenue is vanity, profit is sanity, and cash flow is king.
Don’t be one of the 40% of business owners who lie awake at night worrying about money. Get proactive and put in place these tips and you’ll sleep like a baby.
Originally published on Smallville.