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The perils of poor company cash flow – and how you can avoid them

Even if your business is doing an outstanding job at developing a product and making sales, that's still not a guarantee of strong financial health. The other element to consider is cash flow, and that's an area where many otherwise well-run companies have a tendency to fall short.

Let's take a look at some of the common problems that arise for companies with poor cash flow.

This might apply to you. You might be making lots of sales, but are you following up on that by collecting payments from the customers who owe them? If not, you risk damaging your company both short-term and long. It's much harder to drive real business improvement if you don't have the cash on hand to pay for it.

Let's take a look at some of the common problems that arise for companies with poor cash flow, then examine the strategies you can use to avoid them.

What happens when your cash flow suffers?

When cash flow problems start to crop up at your business, it's absolutely a situation that merits taking seriously. As the South Australia Department of State Development correctly noted, cash is king, and there are a number of negative side effects that can result from not having it.

One is the potential for damage to company morale. When your cash flow isn't healthy, you have to live in a state of constant panic that you won't be able to handle basic costs like rent, wages and raw materials for production. This mindset will be visible to the entire staff, and it may well create a culture of unrest and a lack of confidence in the business. This will only make things worse.

Furthermore, when you don't have cash on hand, it's tough to make key tactical decisions that could potentially help your business improve. For example, you might have an opportunity to buy a large quantity of supplies at a discount price, or hire a new employee who could take your company to the next level. Ordinarily these would be golden opportunities, but if you can't afford them, they're a waste.

Taking steps to actively improve debt collection

There's no sense in panicking about poor company cash flow. Instead, you should devote your energy to tangible, constructive actions you can take to improve the situation. According to Small Business Trends, one of the best things you can do to improve cash flow is speed up debt collection by communicating better with your customers.

A quick email might be enough to reengage a customer and get some cash flowing.A quick email might be enough to reengage a customer and get some cash flowing.

"Believe it or not, 75 percent or so of your customers don't stop doing business with you because they are unhappy with your product or service," said Charles Gaudet of Predictable Profits. "Rather, they stop because you have inadvertently ignored them."

For this reason, Gaudet recommends taking steps to reengage customers and get them focused on purchasing and paying again. A simple gesture like an email or phone call can get you back on their radar, and with any luck, the payments will soon follow.

Of course, if they don't, and you're still looking at a stack of unpaid invoices, you might have to explore other strategies.

When all else fails, debtor finance is an option

When you try to improve your company's cash flow but nothing seems to work, you should know that debtor finance is always there as a backup plan. With debtor finance, you have immediate access to cash that can help you out of a rough cycle with invoicing your customers.

Companies of all types can benefit from debtor finance. Whether you're just looking to make ends meet this month, or you have ambitious goals for the long-term growth of your organisation, getting a little funding help can be beneficial. Talk to us today about the benefits we can offer your business.

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Is it time to tighten up your company’s debt collection timetable?

Being successful in business is predicated upon doing everything according to schedule. Whether it's paying rent on your office building, doling out wages to employees or delivering your product to consumers, being timely is important for keeping your company humming along without any complications.

Invoicing customers and collecting the cash you're owed in a timely fashion is crucial.

Debt collection absolutely must be a part of this. Invoicing customers and collecting the cash you're owed is crucial. Without this step, it becomes difficult to pay for all the other top priorities on your company's to-do list.

This brings us to a fundamental question – what's your target turn-around time for invoicing customers and collecting their payments? Is a 60-day billing cycle good enough for your purposes, or do you need to be even faster? It depends on the specific business goals you're looking to accomplish.

Doing what's best for your cash flow needs

If you're dealing with a good deal of unpaid invoices in your company's latest cash flow report, it's time to take a closer look at your procedure and see if you need to tighten things up. It's good to benchmark your approach against others that are common in your industry. According to the Australian Competition and Consumer Commission, it's typical for companies to give debtors 60 days, then report a default once they pass that deadline.

The common practice is that once an invoice passes that 60-day limit, definitive action is taken such as selling the debt away or handing the account off to a debt collection agency. Some companies are even tightening up on this restriction, taking action in 45 days or even 30.

What should your company do? It's hard to say – 60 days is only a general guideline, not a hard-and-fast rule. Your company's limits should depend on what specific cash flow needs you have and how quickly you need to meet them.

Enforcing the best timeframe for your business

Once you have a debt collection framework in place, how will you enforce it and guarantee continued cash flow? According to the American Express OPEN Forum, the key to this is communication – if you keep in touch with your customers and talk regularly about getting payments finalised, everything should be easier.

A quick phone call is all it takes to maintain open dialogue with customers.A quick phone call is all it takes to maintain open dialogue with customers.

Small gestures like follow-up phone calls after the completion of a sale can go a long way. If you ignore your customers post-sale, they might ignore you too – which means they could easily forget to send in payments. If you have a communication routine, though, there should be fewer hiccups.

Some customers just need a quick email or a letter to remind them about paying up; with others, phone calls might work better since they're a way of having direct conversations and nailing down answers. Either way, the entire process is smoother if you have a plan you can stick to.

Getting financial help when you need it

Having reliable access to the cash you need is crucial for running a business from day to day. If you're worried that you might not have the funds you need, it makes sense to have a contingency plan in your back pocket. Fortunately, debtor finance can be that plan.

With debtor finance, you gain a way of improving the consistency of your cash flow. If you need money quickly to cover your pressing financial needs, just reach out, and your funds will be available within hours. Debtor finance is always reliable, regardless of whether your customers hold up their end of the deal.

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Bad debts can be bad news for your growing small business

Achieving your small business growth goals is largely a matter of increasing your sales. Why be satisfied with the status quo when you can always do better? There are surely opportunities to attack new corners of the market, build new customer relationships or perhaps just do additional business with the customers you already have.

If you have sales promised in your ledger but your customers are failing to pay what they owe, it can hurt your business.

It's usually a safe bet that the more you sell, the more your organisation will grow. This isn't a guarantee, though. There's a downside – bad debts. If you have sales promised in your ledger but your customers are failing to pay what they owe, it can hurt your business in multiple ways. First off, you don't have the cash you need for future growth, and second, you've got to waste time and energy getting it, which carries a steep opportunity cost.

Therefore, growing your business hinges upon a second goal besides sales – improving your cash flow. How will you do it?

Avoiding situations with bad debt

Perhaps the easiest way to solve the "bad debt" problem and improve your company's cash flow is the preemptive way – simply to avoid bad debts in the first place. According to the Victoria State Government, this can be done if you plan carefully for it in advance.

Before you enter into a business agreement with a new customer, perform thorough background checks and make sure you're not working with someone who has a history of bad credit. If the buyer is reliable, it might be acceptable to sell them products on a credit basis. But if they're not reliable, you may need an alternative approach, such as only shipping to them once their payments have cleared.

You can also improve the debt collection cycle by acting quickly on your end. The moment you know how much a customer owes on a given sale, send them an invoice that spells out exactly what they owe and when they're required to pay it. If you make all the rules clear in advance, customers will have no excuse for not following them.

Taking proactive steps toward debt collection

If you've done your best to avoid bad debts and still not been successful, it might be time to kick it into another gear. What can you do to turn that pile of unpaid invoices into a timely series of payments?

It might be time to pick up the phone and ask about those unpaid debts.It might be time to pick up the phone and ask about those unpaid debts.

The Globe and Mail recommends being proactive about it. Rather than letting unpaid debts fester for weeks at a time, pick up the phone and talk to your customers early in the process, asking about getting those debts paid. This doesn't mean you have to be pushy or jump to conclusions about your customers being deadbeats – especially early in the process, your debt collection calls can be friendly and courteous.

While you don't want to get angry or otherwise overly emotional about collecting debts, you do want to be firm and finalise the details on how you'll be paid. When you talk to debtors, try to nail down exactly how much they can pay you, how and when. This will help your business plan better for the future.

Getting debtor finance when you need it

Sometimes, despite your best efforts, you simply aren't able to collect debts as quickly as you'd like, and you start to encounter trouble with investing in your company's future. If and when this happens to your business, it might be time to consider how debtor finance can help.

Cash flow can make or break a business, and debtor finance represents a way to improve cash flow by getting quick access to the money you're owed. Not every debtor can be trusted to pay you in a timely fashion, but fortunately debtor finance is a reliable way to get cash without waiting or worrying.

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Are you ready to start adding to your small business’ staff?

If you've been running a small business successfully for some time now, it's easy to be content with the status quo. When your operations are humming along and the money is flowing in, why rock the boat? There's no reason to ruin a good thing.

If you can hire additional staff members, you might be able to take your business to the next level.

On the other hand, if you ride your current wave of good fortune and use the money you're making to hire additional staff members, you may be able to take your business to the next level. With greater manpower at your disposal, you just might be able to have the same successes you're having now, just on a larger scale. In other words, you can multiply your profits.

But how will you find the talent you need to make your organisation better? And even if you do find great employees to add to your staff, how will you go about paying them? These are difficult questions for even the savviest entrepreneurs.

Devising strategies for finding talent

If your company has a decent supply of working capital saved up and you decide it's time to start adding to your staff, the first step is to start sourcing. This means you have to decide where you're going to find talented people to fill your candidate pool.

Social media is often seen as the wave of the future in staffing, as it's a way to connect with a wide variety of people in a quick and efficient manner. Depending on the site you use, you might be able to connect with the perfect audience – LinkedIn is great for connecting with older, more mature professionals, for example, while Twitter is great popular with young people following the latest trending topics.

Having said that, there might be a better way to find talent. Australian Government data indicates that only about 5 per cent of job postings are being filled via the social route. What's more common, and in many cases more effective, is using specialised staffing agencies run by talent experts who have the expertise to fill particular positions.

Figuring out the compensation logistics

It's one thing to decide you're ready to start staffing your business; it's quite another to actually find the money for it. Overcoming this challenge requires having a steady stream of cash flow. It also demands that you figure out a fair amount of sometimes confusing logistical details.

Figuring out payroll logistics is one of the toughest parts of hiring.Figuring out payroll logistics is one of the toughest parts of hiring.

According to the Fair Work Ombudsman, it's required in Australia to pay wages at least monthly to your employees, if not more often. They must be paid in cash, cheque, money order or postal order. In addition, your business is required to keep detailed records of all wages paid out. This must include pay levels, hours worked and all other details that impact each employee's compensation.

If your records aren't in order, or if they aren't reading accessible to any Fair Work Inspector who wants to read them, your business might be in trouble. Make sure you get all the logistics right.

Get financial help with wages, if you need it

While adding to your staff can be a tremendous boon to your business, it's difficult to pull off if you don't have the funds available. This is why debtor finance can be a tremendous asset for your business – with debtor finance, you can quickly and securely get the cash you need to hire right away.

Cash flow is often unreliable, especially with a smaller business. You never know when your next payment is coming in, or whether you'll make it to the next one. With debtor finance, you can simply collect the money you need quickly and put it to good use, improving your business overnight.

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Forecasting cash flow can help maintain your business’ financial health

Any business is fragile, but this is especially true of a young startup that's still working out the kinks in its operations. If you're still settling into a routine with your customers, trying to figure out their tendencies with orders and payments, it can be hard to find business stability.

Essentially, the challenge boils down to cash flow. To take your startup to the next level, you need to have cash – the more you have, the more talented people you can bring on board to help drive growth. This means it's difficult to achieve your growth goals when you still don't have a good handle on who's paying you, how much and when. 

To take your startup to the next level, you need access to quick cash.

This is where cash flow forecasting can play a role. Try to figure out what your upcoming payment schedule will look like. If you can't determine everything precisely, at least get an estimate. This information can be priceless when it comes time to map out your future growth plans. Conversely, if you don't have this knowledge, it might be devastating.

Knowing just what's at stake

If you're unclear on why it's so important to forecast your company's cash flow, consider this statistic. According to the Victoria State Government, 80 per cent of companies that fail in Australia do so because of trouble with managing cash flow. You might think there's another problem at work, like a product that's unpopular or a business model that's unviable, but those are just a small part of the problem. Usually, collecting cash is the real issue.

With this in mind, you've got to take active steps to make sure your company isn't one of the failed ones. Stay on top of potential cash flow issues by looking ahead and trying to predict how much you'll collect and when. If you have a good forecast at your fingertips, you can make savvy financial decisions that consider both your present and future needs.

Using analytics to make predictions

The goal in cash flow forecasting is to take all your company's sales, both now and later, and predict when you'll actually collect the money that's been pledged to you. It's all about turning theoretical numbers into tangible working capital.

Sometimes, it's difficult to guess when you'll get that cash, but here's the good news – incorporating a little bit of analytics can make that process significantly easier. According to CIO World, companies in Australia have already had a good deal of luck using modern technology to predict debt settlement dates.

"When we are doing cash flow forecast, we needed that settlement date," said Armand Mizan, manager of business systems and development at Australia Post. "In order to overcome that, we applied lags to transactions to arrive at a settlement date."

Analytics can help you make key decisions about forecasting cash flow.Analytics can help you make key decisions about forecasting cash flow.

If you can figure out how long transactions tend to take, you can predict when each dollar you're owed will be collected. Armed with this information, you can make smarter decisions about your company's future.

How you can improve payment processing

Of course, all the analytics can do is give you rough estimates. There are still no guarantees that a good cash flow forecast can lead to a healthy business.

There are some tangible steps you can take to smooth out payment processing.

If you still have doubts involving your company's unpaid invoices, there are some tangible steps you can take to smooth out payment processing and improve your company's financial health. For example, recommends syncing your company's credit terms with its financial needs. If you have major expenses that are due within 15 days, then send your customers invoices that with due dates that line up. The last thing you want to do is deal with a lag period that threatens your company's stability.

The other thing you can do to improve cash flow is, quite simply, to get more cash. If you need a little extra money to help you get through a challenging business cycle, there are ways you can reach out and get it.

If you need a little extra cash…

Even if you write the perfect cash flow forecast that shows exactly when you can expect to have money in the bank, you still can't be sure. Some billing cycles don't go the way you expect, even if all the analytics say they will. If and when your company has such problems, it'll be good to have a backup source of funding available such as debtor finance.

All sorts of companies can extract real benefits from using debtor finance. Your company might be large or small; it might be dealing with a temporary billing issue or a long-standing structural problem. In any event, the cash you need to fix your business might be just one phone call away. There's no better time than right now to find out.

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A solid invoicing strategy is the key to running a healthy business

To a significant extent, the success or failure of your business will be predicated upon the health of your cash flow. If you can collect payments from customers quickly, you'll also be able to turn around and invest the money you make in improving your business without delay. For startups looking to achieve ambitious growth goals, there's no more important step you can take than getting your cash flowing.

The moment someone buys your product, you want to send them all the right payment paperwork.

This process begins with invoicing people properly. The moment someone buys your product, you want to send them the paperwork and make all the details clear – what they bought, how much they owe and when they owe it. If you can do this much, you'll have gotten the ball rolling.

This all sounds simple, and yet it's remarkable how many companies fall short in this area. Don't let yours be one of them – figure out your invoicing strategy as soon as you can.

How to write an effective invoice

If you want to iron out the wrinkles in the billing cycle and get working capital into your company coffers quickly, the first step in that process is knowing how to write a good invoice.

According to the Department of Industry, Innovation and Science, the most important thing is to make sure you include all the necessary pieces of information, leaving nothing out. For example: It's important to list exactly what the customer is paying for, in specific terms, and show explicitly which amounts are for which items. Beyond that, you also have to make it clear how people should pay you and by what due date. Omitting any of these elements will only create confusion.

It's also crucial to choose your medium for sending invoices. This might be via email, fax, regular postal mail or any other platform you desire. The key is to choose something your customers will be comfortable with. The goal is to get them settled into a payment routine so they're willing to pay up quickly.

Avoiding some common invoicing pitfalls

Invoicing might seem like a fairly simple process, but you'd be surprised at how often companies make little mistakes that sidetrack them. If you study up on what these mistakes are, you can be more aware of how to avoid them.

Trouble with invoicing can be bad news for your organisation.Trouble with invoicing can be bad news for your organisation.

BudgetOne cautions that one of the most common mistakes companies make is writing vague invoices that don't clearly delineate what customers are being charged for. If you aren't able to clearly spell out why the customer owes you money, they're unlikely to believe you or have any motivation to pay up. 

Other common problems involve timing and location. If you send an invoice late, it hurts your credibility. If you mail it to the wrong address, you're also in for a big logistical headache – poorly delivered invoices tend to be unpaid invoices. If you're careful and detail oriented in everything you do, the entire process should be much smoother.

Do you still need an extra cash flow boost?

Even if you follow all of the above guidelines to the letter, there are no guarantees. Sometimes in business, you do a great job writing invoices and sending them out, and customers still struggle to pay you in a timely fashion, for whatever reason. These things happen.

When they do, you'll want to have a backup source of cash flow – and that's exactly what you get with debtor finance. The beauty of debtor finance is there's no uncertainty about the money you'll get or the timeframe in which you'll get it. If you need quick cash now, reach out to Cashflow Finance today and ask for it. We'll be ready to respond in your time of need.